The S&P 500 wasted another good opportunity to rise – where the credit markets were largely aligned. Is it a sign of upcoming tremors that the 500-strong index couldn't defend the daily gains? Commodities weren't under pressure, the dollar wasn't surging (looking at the closing prices), precious metals did well, and even lumber enjoyed a white candle again.
Inflation expectations retreated, and so did Treasury yields. What's holding stocks then? It is not uncertainty about the Fed policy, nor surging inflation cutting into P&L, nor crashing bonds. What we're seeing is run of the mill volatility, as stocks move both into a structurally higher inflation environment, and await Fed moves that are much farther down the time line than the markets appreciate. Heck, even the option traders keep undergoing the earlier announced shift to complacency.
Yes, the taper talk has dialled back the inflation trades to a degree. In reflation, both stocks and commodities do well. And we're still far away from worrying about weakening GDP growth rates. Today's ADP and unemployment data are a good proof thereof. In my view, worries about inflation not retreating nearly enough during this Treasury market lull (taking up this summer) would come into the picture first.
Reopening trades aren't over, the housing market activity has slowed down a little, while XLRE keeps running, financials remain as strong as value, and no tech growth. Capacity utilization isn't at the top of the pre-corona range, and oil prices aren't biting nearly enough. The job market isn't at the strongest either, and the hours worked don't match prior extremes either. Last but not least, global supply chains haven't entirely recovered to meet demand.
We're undergoing stock market and commodities' gyrations as we settle into the new reality of higher inflation. Neither the 10-year yield rising way over 2.5% would derail the stock bull run – but the associated volatility would be keenly felt already at the 2% level. We're very far from that, meaning I am not worried about the stock market leadership baton passing exlusively over to tech (growth) stocks. That would equal panic.
Gold ascent is slowing down, but miners don't support a lasting downswing. Volatility around the $1,900 mark. Gold is likely to recover, and faster than silver. The white metal will suffer from any marked slowdown in inflation.
Crude oil rose strongly once again, and so did the oil index.
The Bitcoin and Ethereum recovery goes on, and I'm looking for more base building before the bulls take on and overcome the red ETH resistance line featured on Tuesday. Patience is needed before more confidence returns to the sector.
Let's move right into the charts (all courtesy of www.stockcharts.com).
S&P 500 Outlook
The S&P 500 and NASDAQ Composite wavered in the last few days, an eloquent warning sign that the bears will try their luck – and they would ultimately fail.
Credit Markets
High-yield corporate bonds actually outperformed the rest of the crowd, making the SPX stumble harder to stomach.
Technology And Value
Technology had a mixed day. It's true that the daily leadership was with Technology Select Sector SPDR® Fund (NYSE:XLK) yesterday, but that still remains white noise, as value isn't yet down and out – Not by a long shot.
Summary
Look for any S&P 500 downside to be largely bought when the dust settles.
Gold and silver remain well bid, but the slowing pace of gains means that the bears might come out from hibernation – only to be repelled though. Look for copper to stabilize as a precondition, with miners not falling through the floor.
The odds favour can upleg for crude oil, but unless commodities and metals rebound, black gold would be vulnerable.
Bitcoin and Ethereum are peeking higher, and a continuing rebound is probable.