Strange disconnect in the market is raising a red flag for one market watcher

A disconnect between equities, bonds and the currency market as tax reform legislation nears passage has one equity strategist concerned.

The S&P 500 has rallied to record highs as investors price in hopes of corporate tax cuts, but the Treasury market and U.S. dollar are not behaving in a similarly bullish manner, said Matt Maley, equity strategist at Miller Tabak. This, along with the stock market's overbought condition, will be of concern in the beginning of 2018, and he has three charts to back up his cautious view. Here's why.

• The S&P is quite overbought on a near-term basis, as its weekly relative strength index is at its most overbought in history. This indicates the market may be ripe for a "sell the news" reaction to the sweeping tax bill, should it pass.

• Meanwhile, the bond market as measured by the iShares 20+ Year Treasury Bond exchange-traded fund (TLT) has traded in a sideways range for months.

• The U.S. dollar index, too, has moved in a similarly narrow range rather than rallying on the prospect of economic growth and higher interest rates.

• This disconnect between various asset classes is raising the question of whether the tax reform bill is truly going to have a major bearing on the economy. While the stock market is saying yes, the other markets are saying perhaps not so much.

Bottom line: While stocks have rallied to all-time highs on tax reform-related optimism, bonds and the U.S. dollar have not reacted in a similar fashion. This raises the question of the kind of economic impact the bill could have.

Videos

Trades to Watch

Trader Bios

About

Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

Read more

Connect