Currently the Fed has essentially proclaimed that they are content for inflation to climb higher, as indicated with their quantitative easing policy. However, the nearly unanimous consensus of average investors is for a stronger U.S. dollar, weaker commodity prices and lower emerging-market equity valuations.

Nervous Treasury holders will continue to hope for rebound in prices, bailing out only when the ultimate bottom is closely approaching for TLT and similar long-dated bond funds. So what will happen when most investors have positioned their portfolios to benefit from deflation? Expect the market do what it has always done. When a particular trade has become extremely overcrowded then the market will ensure that it will fail regardless of its fundamentals.

Emotionally it is very difficult to trade against the herd. This article, “The ultimate contrarian trade,” intelligently written by Michael Gayed, describes why this “against the herd” position can work, more often than not.

Most investors are obsessed with the future behavior of general equity indices rather than seizing upon the historic disparities between various sectors.

Sooner than later cyclical securities will capitalize upon their all-time record undervaluation relative to high-yielding assets by staging their strongest rallies since their strong percentage gains in November 2008 through to April 2011.

Like a pendulum, an extreme in one direction in the financial markets creates a much greater likelihood of an equal and opposite extreme in the opposite direction.