Bullish run in stocks is on, driven by tech gains and value swinging higher. Throughout the markets, risk-on has been making a return as long-dated Treasury yields retreated, the U.S. dollar fell and commodities continue their bullish flag formation. Given such a constellation, the dollar‘s appeal is taking a dive as the bond market gets its reprieve. When nominal yields retreat while inflation (and inflation expectations) keep rising, real rates decline, and that leads to dollar‘s decline.
Stocks are more focused on the tidal wave of liquidity rather than the tax increases that follow behind. So far, it's still reflation – tame inflation expectations given the avalanche of fresh money, real economy slowly but surely heating up (non-farm payrolls beat expectations on Friday), and not about the long-term consequences of tax hikes:
(…) Reduction in economic activity, unproductive moves to outset the effects, decrease in potential GDP? Remember the time proven truth that whatever the percentage rate, the government always takes in less than 20% GDP in taxes. The only question is the degree of distortions that the tax rate spawns.
And as the falling yields were embraced by tech with open arms, the sector's leadership in the S&P 500 upswing is back. As you'll see further on, the market breadth isn't pitiful either – slight non-confirmation yes, but I am looking for it to be gradually resolved with yet another price upswing, and that means more open profits (that's 7 winning stock market 2021 trades in a row).
The Fed thus far quite succeeded in passing the inflation threat off as transitory, but the rebalancing into a higher inflation environment is under way – just look at the bullish consolidation across many commodities.
The crucial copper-to-10-year-Treasury-yield ratio is slowly turning higher as the red metal defends gained ground. The oil rebound is progressing and lumber is moving to new highs. And don't forget the surging soybeans and corn either. Apart from having positive influence upon S&P 500 materials or real estate sectors, precious metals have welcomed the turn, rebounding off the double bottom with miners‘ leadership and silver not getting too hot yet. And that's positive for the white metal's coming strong gains – let alone the yellow one's.
Let‘s move right into the charts (all courtesy of www.stockcharts.com).
S&P 500 And Its Internals
Slightly lower volume during the whole week and Friday is merely a short-term non-confirmation. It isn't a burning issue, as stocks closed the week on a strong note. The bullish price action on the heels of improving credit markets and technology-led S&P 500 upswing, has good chances of going on.
See by how much market breadth improved versus Thursday – both the advance-decline line and advance-decline volume turned reasonably higher, and given the tech leadership in the upswing, new highs new lows merely levelled off. For them to turn higher, value stocks would have to step to the fore again.
Then, the high-yield corporate bonds to short-dated Treasuries (HYG:SHY) ratio confirmed the stock market upswing with its own bullish move, and the two are overlaid quite nicely at the moment. No whiff of non-confirmation there.
Tech And Value
Tech (Technology Select Sector SPDR® Fund (NYSE:XLK) ETF) rose strongly, and value stocks (Vanguard Value Index Fund ETF Shares (NYSE:VTV) ETF) stocks more than defended prior gains. Even financials (Financial Select Sector SPDR® Fund (NYSE:XLF) ETF) moved higher, regardless of the rising Treasuries. The breadth of the stock market advance isn't weak at all, after all.
Summary
S&P 500 has challenged and conquered the 4,000 mark, and the upswing's internals keep being aligned bullishly. No sharp correction in sight indeed.
The precious metals' rebound lives on, accompanied by the miners' outperformance. Copper and many commodities keep consolidating, which is actually bullish given the retreat in yields. Another confirmation of the approaching upleg in commodities and precious metals as inflation starts running hotter and hotter.