The S&P 500 is refusing to keep early gains, and has reversed back into no man‘s land, on light volume. For now, we remain chopping below the 4,180s level, and conquering it would a bullish achievement. Until that happens on convincing internals, fake moves in both directions will likely remain with us.
The Fed telegraphing about tapering is a first step in preparing the markets not to be surprised by the actual deed. Stocks, bonds and currencies aren‘t reacting much – it‘s only commodities that are in consolidation mode, but this can be chalked down to inflation expectations calming down over the prior three trading days. Until the Fed truly moves or makes its forward guidance as unequivocal as can be, the markets will be in a doubting attitude (or at a minimum, a wait and see one):
The market simply isn‘t convinced the Fed is serious about taking on inflation through (gradual) removal of the punch bowl – or about shaping its forward guidance credibly this way (yet). Inflation expectations are cooling down a little, and the Treasury market is tracking them closely. But this doesn‘t mean that bonds are taking the central bank seriously – this move is part and parcel of the transitory vs. getting (practically permanently unless a Fed game changer arrives – still unlikely) elevated inflation readings debate.
While I think that the red hot CPI will slow down a little (i.e. not keep rising ever as steeply as was the case with Wednesday‘s data) once the year on year base to compare it against normalizes, a permanently elevated plateau of high and rising inflation will be a reality for more than the foreseeable future simply because the Fed would be behind, and upward price pressures in the job market pressures would kick in.
Thus, look for the Treasury market calm to continue, affecting the defensive sectors and to a certain degree tech too. Technology is suffering – the reopening s are the stocks are the star performers as FAANG lags behind. Tech had rebounded off very oversold levels, and isn‘t likely to revisit them. That‘s the essence of my (moderately but still) bullish NASDAQ call.
Gold and silver have been going different ways, with the white metal driven by commodities giving off air. The gold sector remains well positioned as the miners keep pulling ahead, nominal yields aren‘t rushing headlong to the upside, and inflation isn‘t turning around.
Copper relative to the 10-year Treasury yield remains wait and see, with the red metal relevant especially to silver. For now, gold remains a coiled spring with limited downside until conditions materially change.
Crude oil found a daily bottom that looks promising to hold at first sight, but the oil index gave up all of its intraday gains. In this light, the WTI crude rebound looks a bit stronger short-term than could have been expected, meaning that a downswing attempt in can‘t be excluded. At the same time, upside potential is greater though.
Bitcoin made one more attempt on Wednesday‘s lows on Sunday, and Ethereum undershot them. Both have swung higher but remain well below Friday‘s levels – the lookout remains tense until Bitcoin reaches $38,000 and Ethereum hits $2,400.
Let‘s move right into the charts (all courtesy of www.stockcharts.com).
Gold, Silver and Miners
The gold sector is cooling off without giving up gained ground. Miners aren‘t leading to the downside while nominal yields could provide a greater tailwind to the yellow metal.
Silver is losing altitude as much as copper, but the red metal‘s ratio to 10-year Treasury yield isn‘t pulling the yellow metal down – because of real rates barely changing.
Crude Oil
Crude oil is basing, and the forces between the bulls and bears are more than even – current prices are attracting buying interest, which might however take a while to materialize in sustainably higher prices unless the oil index recovers too.
Summary
S&P 500 bulls remain supported by the credit markets, with value pulling ahead again. Time to be bullish both the 500-strong index and look for a NASDAQ entry point as April, which began with sideways trading, was full of fake breaks higher or lower and it is now slowly drawing to an end.
Gold and miners defend gained ground, but look for silver to remain vulnerable to the downside thanks to the pressure on commodities from both the bond markets and inflation expectation moves.
Crude oil is stabilizing and the oil index supports higher prices, but one more pullback might be on the cards. And should commodities turn red en masse again, oil probably will not escape.
Neither Bitcoin nor Ethereum have truly stabilized yet, and remain short-term range bound with more selling pressure a distinct possibility. While the worst appears over on a very short-term basis, the dust hasn‘t settled just yet.