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 the high pace of economic growth, it‘s the Fed that‘s between a rock and hard place.

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 the 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 market's 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 sudden souring that would hit many advancing stocks hard. Financials weakness yesterday is a watch out 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.