Friday‘s great run gave way to yesterday‘s consolidation, and stock bulls appear in need of more before taking out the psychological 4,000 mark. The Archegos crash isn‘t causing contagion fears the way GameStop in late Jan did. The current volatility and put/call ratio simply doesn‘t reflect that.

The theme is still one of reflation – while inflation expectations are rising, and so are the inflation data for those who care to examine them closely enough, true inflation isn‘t yet here with us. Markets are merely transitioning to a higher inflation environment already, not buying the Fed‘s transitory explanation. Commodities are basing at the conquered levels before another run higher.

Make no mistake though, the current S&P 500 upswing is heavily reliant on the defensive sectors – technology isn‘t standing in the way, utilities and consumer staples are doing great, and so are several areas within the real estate sector such as the residential one, or REIT ETFs that can be expected to keep doing well. Couple that with value stocks not really retreating, and you get the current view of S&P 500 advance structurally.

Credit markets though are a little lagging behind – thanks to the return of rising yields, working its predictable magic on investment-grade corporate bonds as well. Such were my points from yesterday‘s extensive analysis, diving into the big picture across the markets and the economy:

(…) With 10-year Treasury yields at 1.67%, last week‘s decline didn‘t reach far before turning higher. Remembering stock market woes the first breach of 1.50% caused, stocks have coped well with the subsequent run-up – while in the old days of retirees actually being able to live off interest rate income, a level of 4% would bring about trouble for S&P 500, now the level is probably just above 2%. Yes, that‘s how far our financialized economy has progressed – and I look for volatility to rise, and stocks to waver and likely enter a correction at such a bond market juncture. As always, I‘ll be keeping a close eye on the signs, emerging or not, as we approach that yield level.

The bond market isn‘t merely anticipating an economic recovery that has good chances of overheating still this year, it‘s also reacting to:

(…) the fresh money avalanche, activist fiscal and moterary policy to hit the markets as a tidal wave. Modern monetary theorists‘ dream come true. Unlike during the Great Recession, the newly minted money isn‘t going to go towards repairing banks‘ balance sheets – it‘s going into the financial markets, lifting up asset prices, and over to the real economy. So far, it‘s only PPI that‘s showing signs of inflation in the pipeline – soon to be manifest according to the CPI methodology as well.

Any deflation scare in such an environment stands low prospects of success.

Continuing:

(…) For deflation to succeed, a stock market crash followed by depression has to come first. And as inflation is firing on just one cylinder now (asset price inflation not accompanied by labor market pressures), it isn‘t yet strong enough to derail the stock bull run. The true inflation is a 2022-3 story, which is when we would be likely in a full-blown financial repression and bond yields capped well above 2% while inflation rate could run at double that figure. Then, the Fed wouldn‘t be engaged in a twist operation, but in yield curve control, which the precious metals would love, for they love low nominal and negative real rates.

As I wrote on Twitter, it‘s a question of time when gold starts anticipating the policy turn, snifffing it out just like the Fed having to abandon hawkish positions of late 2018 or the runup to the repo crisis of autumn 2019. We got quite a few decoupling signs, some on a prolonged basis, but gold isn‘t yet leading commodities the way it did both before and after the corona deflationary shock.

Let‘s not forget about the currencies and arbitrage opportunities there – the yen carry trade is still very much alive, making it a no-brainer to borrow in declining currency while parking the proceeds elsewhere – and the one-way trading in $USDJPY in 2021 is a fitting testament thereof. A powerful argument against deflation on our doorstep, by the way.

Quite to the (deflationary shock) contrary at the moment – both commodities and precious metals are under pressure in today‘s premarket session. Another undoing of the miners‘ outperformance?

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

S&P 500 Outlook

Daily consolidation on average volume – no hinting at serious troubles down the road. Buy the dip mentality still rules the day.

Credit Markets

High yield corporate bonds (HYG ETF) chart looks a bit tired to the upside – the bulls had to defend against a serious downswing yesterday first. Contracting volume precedes rising volume, and the best the bulls can hope for is sideways trading coupled with downswing rejection followed by another move higher.

Technology and Value

Technology (XLK ETF) repelled an intraday downswing while value stocks (VTV ETF) merely couldn‘t keep up all the gained ground during the day. So far so good in the run-up or base building on the path to new all-time highs.

Gold in the Spotlight

The daily resilience in the miners would come under heavy pressure today, and GDX can be expected to close lower. Would they still show outperformance vs. the yellow metal? I wouldn‘t bet the farm on it – it appears the Mar 04 game plan will be tested soon instead.

Miners to gold (black line) still keeps painting a bullish picture on the weekly chart, as it refuses to follow the yellow metal to the downside. Where would it be should the $1,670 support zone get tested again – would that level be sufficient enough to power a rebound?

Silver, Miners, and Copper

Silver clearly illustrates the sectoral weakness – the selling waves get harder to repel, and upswing attempts are happening on lower volume. While copper goes sideways, the white metal is breaking lower, and its miners aren‘t showing any strength at all.

Summary

S&P 500 keeps consolidating Friday‘s gains without signs of upcoming, groundbreaking weakness. With volatility at around 20, the path of least resistance remains overall higher – until tech says no more. Again, no hint at that today still.

Gold is again approaching the $1,670 support, and miners‘ performance will send as valuable clues just as before the Mar 08 bottom. Given today‘s downswing, that will be an even more important indication, bearing medium-term consequences as well.