When Markets Get Scared and Reverse / Commodities / Gold and Silver 2021
S&P 500 wasted another good opportunity to rise – onewhere the credit markets were largely aligned. Is it a sign of upcoming tremorsthat the 500-strong index couldn‘t defend the daily gains? Commodities weren‘tunder 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 Treasuryyields – what‘s holding stocks then? Neither 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 stocksmove both into a structurally higher inflation environment, and await Fed moveswhich are much farther down the time line than the markets appreciate. Heck, even the option traders keep undergoingthe earlier announced shift to complacency.
Yes, the taper talk has dialed back the inflation tradesto a degree, but hasn‘t knocked them off in the least. In a reflation, bothstocks and commodities do well, and we‘re still far away from worrying aboutweakening GDP growth rates (today‘s ADP and unemployment data are a good proof thereof) – inmy view, worries about inflation not retreating nearly enough during thisTreasury market lull (taking up this summer) wouldcome into the picture first.
Reopening trades aren‘t over, the housing market activity(housing starts, new home sales) has slowed down a little while XLRE keepsrunning, financials remain as strong as value (yes, there is more juice in thattrade still), and no mad rush into tech (growth) is underway. Capacityutilization isn‘t at the top of the pre-corona range exactly, and oil prices(these serve as additional tax, a drag on the economy) aren‘t biting nearlyenough. The job market isn‘t at the strongest either, and the hours workeddon‘t match prior extremes either. Last but not least, global supply chainshaven‘t entirely recovered to meet the reopenings-boosted demand.
Plenty of extra reasons why I talked the transitory vs. getting structurally elevated (unanchored)inflation yesteerday:
(…) The Treasury market‘s lull only means that inflation trades have been dialed back somewhat,but haven‘t been broken. As I wrote on May 27, so far it‘s only the preciousmetals that are relentlessly calling the Fed‘s bluff – by rising almost in astraight line. And when you thought the transitory or permanently elevatedinflation debate couldn‘t get any more ridiculous, there comes the Dudley dovetalking how transitory could become permanent –it‘s almost as miraculous as being half pregnant.
Seriously, it‘s a testament to the Fed communication‘ssuccess that the transitory story has been swallowed hook, line and sinker tothis degree. We‘re getting a temporary reprieve but the cost-push inflation isn‘t going away.At the same time, we‘re in a reflationary period before inflation starts biting noticeably more.
How close before the wheels come off, and would that comefrom inflation or growth worries? There are two distinct possibilities: GDPgrowth and its projections start sputtering, or inflation (including inflationexpectations) don‘t come down nearly enough as much as the transient campbelieves. I‘m in the latter camp.
Timing is everything, though. Any growth scare wouldn‘tmaterialize before we „discover“ that inflation isn‘t really going away. Addthe job market pressures entering the fray – discussed on May 19 – you‘llsooner take fright over persistent inflation hitting the growth prospects thanseeing them downgraded first. No deflationary scare quarters ahead either,sorry – 2021 will be another good year in stocks.
This also speaks against a sharp (think 10% and higher)correction in the stock market over the summer, and likewise affectscommodities. These would employ a wait and see approach, with precious metalssticking out like a sore finger. Forget the taper dog and pony show.When the Fed is forced to move, precious metals win – either way.
In other words, we‘re undergoing stock market andcommodities‘ gyrations as we‘re settling into the new reality of higherinflation including expectations, which isn‘t yet putting the stock market totest. Neither the 10-year yield rising way over 2.5% would derail the sttockbull 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 stockmarket leadership baton passing exlusively over to tech (growth) stocks. Thatwould equal panic.
Gold ascent is slowing down, but miners don‘t support alasting downswing. Volatility around the $1,900 mark, yes but a plunge on stockmarket downswing / Fed tapering / commodities reversal, no – as if any of thethree actually applied. After initial selling when liquidity needs to be raisedno matter where from (the AMC saga coming soon to a theater near you), gold islikely to recover, and faster than silver (the white metal would suffer fromany marked slowdown in inflation, I must add).
Crude oil rose strongly once again, and so did the oilindex – the energy sector ETF is doing great. The daily chart still remainsbullish, offering no clues of a reversal, let alone of a correction.
Bitcoin and Ethereum recovery goes on, and I‘m lookingfor 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 into the sector.
Let‘s move right into the charts (all courtesy of www.stockcharts.com).
S&P 500 Outlook
S&P 500 and Nasdaq wavering in latest days is aneloquent warning sign that the bears will try their luck – and they wouldultimately fail.
Credit Markets
Technology and Value
Technology had a mixed day while value remainsunyielding. It‘s true that the daily leadership was with XLK yesterday, butthat still remains white noise as value isn‘t yet down and out. Not by a longshot.
Gold, Silver and Miners
Gold rose a little stronger than the miners yesterday,but the move in either shouldn‘t be overrated. While the yellow metal can‘tbreak higher with confidence now, its dips remain to be bought.
The copper to 10-year Treasury yield ratio stabilizedyesterday, but the swing in either copper or long-dated Treasuries spells noshort-term calm.
Bitcoin and Ethereum
Bitcoin and Ethereum charts are solidly recovering, butsome breather next wouldn‘t surprise me. Overall, the stage remains set to gohigher.
Summary
What doesn‘t go up, must come down – but look for anyS&P 500 downside to be largely bought when the dust settles.
Gold andsilver remain well bid, but the slowing pace of gains means that the bearsmight come out from hibernation – only to be repelled though. Look for copperto stabilize as a precondition, with miners not falling through the floor.
Crude oil odds favor a new upleg to proceed, but unlesscommodities and metals rebound, black gold would get vulnerable.
Bitcoin and Ethereum are peeking higher, and reboundcontinuation is more probable than other scenarios.
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MonicaKingsley
Stock Trading Signals
Gold Trading Signals
www.monicakingsley.co
mk@monicakingsley.co
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