Tug of War and Its Profitable Resolution

 S&P 500 bid is improving in breadth, and the fake moves rich consolidation‘s lows are getting more distant. And they are likely to stay that way as the market reassesses the Fed intentions to talk about talking taper – making the dollar catch a bid at first, the greenback keeps predictably tanking now, meaning that the Fed noises aren‘t to no surprise of mine taken seriously in the currency arena:

(…) It‘s when the Fed would really move that the greenback would go up again. The important word here is „really“ – this doesn‘t qualify yet, but the noises can‘t be ignored.

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 that I discussed on Monday:

(..) while I think that the red hot CPI inflation would die 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 would be a reality for more than foreseeable future simply because the Fed would be as behind as Arthur Burns was in fighting the 1970s inflation, and upward price pressures in the job market pressures would kick in.

Thus I see the Treasury market reprieve as likely to continue, affecting positively tech and the defensive sectors such as utilities (currently forming a bullish flag), or the more bullish consumer staples and industrials posture. We‘re still in the value outperforming growth environment (reflation and reopening themes), it‘s just right now (last few days) that tech is pulling stronger ahead than value. The discrepancies in sectoral performance of late have been the explanation behind the S&P 500 pendulum swinging bullish delayed again. Value‘s reaction to the yields trajectory ahead would be telling, and I have no doubts there is quite some more juice left in the long value trade (and that the Russell 2000 isn‘t rolling over to the downside here).

VIX is confirming the coming calm and so does the put/call ratio – bulls rejoice as the credit markets point in the same direction too. Inflation sinking P&L and stocks isn‘t yet on the cards, not by a long shot – my open S&P 500 profits keep growing.

Gold and silver aren‘t crashed by the Fed noises about prepping for the inflation specter. Quite to the contrary, miners are pulling ahead, and copper offers still a positive view when combined with yields. The precious metals upleg is in no jeopardy as we work through this short-term soft patch in its closing stages – my new gold positions are profitable already.

The miners to gold ratio says this is just white noise aka pullback within an uptrend – nothing to disturb the bulls. Keep in mind the big picture:

(…) as I stated a month ago, the unavoidable inflation data bringing down real rates, are forming a bid below the metals, mainly below gold. What started as a decoupling from rising nominal yields that I talked in early Mar, will continue in a more obvious way, the more the markets would worry about Fed‘s perceived control over inflation.

The more the Fed moves to control nominal rates, the more under pressure real rates would get – more than a single kiss of life for precious metals.

Crude oil declined once again but is about to carve out a local bottom. The recent selloff has been a little overdone – that‘s what headline risk usually does. The oil sector ($XOI) isn‘t panicking, and still favors the bulls.

Bitcoin and Ethereum rebounded from extremely oversold levels, and both are chopping around their 50-day moving averages. Bitcoin is the stronger one here, as can be seen from the strength of yesterday‘s rebound compared to the preceding day‘s selloff starting position. Still, even this choppy environment allowed me to grab some very modest long Ethereum profits as this second oldest crypto isn‘t yet ready to offer more.

Let‘s move right into the charts (all courtesy of www.stockcharts.com).

S&P 500 Outlook

We‘re quite close to the 4,180s level, closing above which I view as key for further S&P 500 gains.

Credit Markets

Corporate bonds – whether high yield or investment grade ones – have turned very supportive of S&P 500 gains. I would look next for junk bonds to catch up more vigorously to give the stock bulls some more real legs.

Technology and Value

Tech and $NYFANG keep rising, bullish Nasdaq bets paying off – and finally value has turned. Watch out though as Fed-driven change in gears wouldn‘t serve VTV well – but again, there is still time.

Gold, Silver and Miners

Miners are indicating that the upswing pause shouldn‘t be overrated – and nominal yields won‘t stand in the way.

The copper to 10-year Treasury yield ratio is turning supportive again as the red metal is holding up well in spite of nominal yields retreating or China attempting to cool down domestic speculation in this and other commodities.

Bitcoin and Ethereum

The caption says it all – the crypto rebound hasn‘t elicited full interest of neither the bulls nor the bears thus far.

Summary

S&P 500 bulls still have the initiative and increasing credit market support. I expect the outlook would turn clearly bullish shortly as this correction is much closer to its end that the start of the April started tired sideways trading full of fake breaks higher or lower.

Gold and miners posture keeps improving, but look for silver to remain vulnerable to the downside thanks to the pressure on commodities that I expect from both the bond markets and inflation expectation moves.

Crude oil is stabilizing and the oil index supports higher prices, but the local bottom isn‘t yet convincingly formed.

Bitcoin and Ethereum rebound has stalled, and we‘re in the backing and filling stage with Bitcoin being the stronger one here. The dust hasn‘t settled yet in the crypto land.

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Thank you,

Monica Kingsley
Stock Trading Signals
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www.monicakingsley.co
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All essays, research and information represent analyses and opinions of Monica Kingsley that are based on available and latest data. Despite careful research and best efforts, it may prove wrong and be subject to change with or without notice. Monica Kingsley does not guarantee the accuracy or thoroughness of the data or information reported. Her content serves educational purposes and should not be relied upon as advice or construed as providing recommendations of any kind. Futures, stocks and options are financial instruments not suitable for every investor. Please be advised that you invest at your own risk. Monica Kingsley is not a Registered Securities Advisor. By reading her writings, you agree that she will not be held responsible or liable for any decisions you make. Investing, trading and speculating in financial markets may involve high risk of loss. Monica Kingsley may have a short or long position in any securities, including those mentioned in her writings, and may make additional purchases and/or sales of those securities without notice.