No, it‘s not about stocks, however well they hang on to recent gains. ATHs hit again amid recovering corporate credit markets, with both tech and value contributing. Value though was looking more vulnerable going into yesterday‘s session, and just one look at financials or energy confirms that – in the world of question marks over high pace of economic growth, it‘s the Fed that‘s between a rock and hard place.

Q2 2021 hedge fund letters, conferences and more

On one hand, they have stubborn and quickening inflation to deal with (or pretend to deal with through the FOMC, the federal open mouth committee) – getting ahead of the curve means serious tightening (okay, first getting less loose monetarily, which is what taper is about). Given China‘s slowdown and corresponding U.S. figures projected, it would be a tall order to turn off the spigot into a weakening (but still growing) economy – that has potential to trigger quite a correction in stocks and risk-on assets. Note copper and oil paring recent gains, and going largely sideways for weeks – not rolling over, but the light is amber, irrespective of the infrastructure bill.

On the other hand, if the central bank does nothing, inflation would grow even more entrenched, sinking the stock market and economy over time, anyway. Don‘t forget about the massive spending – the Fed turning restrictive isn‘t the math favored outcome here.

Bond yields aren‘t squeezing the Fed‘s hand – the market is paying more attention to growth than inflation at the moment. And that means headwinds for the reflation and commodity trades as these would find rising rates more conducive. Copper to gold ratio is seeing every spike sold since June, underlining the tug of war between the prospects of economy roaring ahead vs. hunkering down.

In such an environment of uncertainty, gold is the winner – just as I summarized it yesterday:

(…) Regarding the taper noises many Fed speakers made during the week (it isn‘t just about Dallas), some form of taper looks indeed coming, even though they would have a hard time pulling it off against decelerating economy and massive fresh spending. Mission impossible if you will. Still, they make the appearance of wanting to try – wouldn‘t tanking markets and fresh calls to do something be a perfect excuse to expanding balance sheet solidly again? But they must at least internally in the Eccles building understand that a move against inflation is long overdue, and perhaps a repetition of June FOMC wouldn‘t do the trick this time.

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

S&P 500 and Nasdaq Outlook

Against all odds euphemistically said, the slow grind higher in stocks continues, with tech getting momentarily a little stronger than value. Volume is so far still behind the upswing – regardless of what the VIX and put/call ratio look like, the bulls aren‘t yet challenged.

Credit Markets

Credit markets upturn continues, but not before having to repel heavy selling at the open. The chart offers no warning signs for the bulls at the moment, with the exception of risk-on optimism being vulnerable to a suddent souring that would hit many advancing stocks hard. Financials weakness yesterday is a watchout reflective of Treasury yields path.

Gold, Silver and Miners

Given the growth fears sentiment of the moment, miners‘ underperformance is more understandable – the yellow metal is set to do well in such circumstances. Silver weakness reflects select commodities such as copper getting under pressure, which equals risk-off undercurrents.

Crude Oil

Energy stocks do a little worse in such an environment, making the daily oil resilience a temporarily good sign – one that I wouldn‘t read too much into for now as the volume isn‘t consistent with a budding reversal.

Copper

Likewise in copper, the modest rebound off the lows isn‘t convincing – there are no signs of heavy buying thus far, making the local bottom still elusive.

Bitcoin and Ethereum

Crypto base building goes on, and the recent price action remains positive for the bulls.

Summary

While the risk of a correction in stocks grows, in many commodities it‘s already here. The decelerating economy as evidenced by today‘s retail sales, is lifting primarily gold, and isn‘t any obstacle to cryptos just yet – the dollar isn‘t biting and yields remain range bound, therefore I look for inflation trades to eventually return to strength.

Thank you for having read today‘s free analysis, which is available in full at my homesite. There, you can subscribe to the free Monica‘s Insider Club, which features real-time trade calls and intraday updates for all the five publications: Stock Trading Signals, Gold Trading Signals, Oil Trading Signals, Copper Trading Signals and Bitcoin Trading Signals.

Thank you,

Monica Kingsley

Stock Trading Signals

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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.