What Correction In Stocks? And Gold?

Stocks thoroughly rebounded yesterday, and corporate credit markets did even better. These are optimistic signs as the shape of the correction has been decided – again, as shallow, less than 5% one. Long-term Treasuries are no longer in a free fall, volatility has retreated back to the low 20s, and the put/call ratio swung back towards the bottom of its recent range.

Technology has rebounded as well, and the microrotations in the stock market keep being the hallmark of stock bull‘s health, and the risk-on (high beta) sectors and segments such as financials, semiconductors, or capex (capital expenditure such as construction and engineering) – and airlines are catching breath too.

Such was the sectoral themes likely to do well that I mentioned yesterday:

(…) That‘s the same about any high beta sector or stock such as financials – these tend to do well in rising rates environments. Regardless of any coming stabilization / retreat in long-term Treasury yields, it‘s my view that we‘re going to have to get used to rising spreads such as 2y over 10y as the long end still steepens. The markets and especially commodities aren‘t buying Fed‘s nonchalant attitude towards inflation. Stocks have felt the tremors, and will keep rising regardless, as it has been historically much higher rates that have caused serious issues (think 4% in 10y Treasuries).

In such an environment, the defensives with low volatility and good earnings are getting left behind, as it‘s the top earners in growth, and very risk-on cyclicals that do best. They would be taking the baton from each other, as (micro)rotations mark the stock market bull health – and once tech big names join again, new highs would arrive. Then, the $1.9T stimulus has made it past the House, involves nice stimulus checks, and speculation about an upcoming infrastructure bill remains.

Coupled with the avalanche of new Fed money, this is going into the real economy, not sitting on banks‘ balance sheets – and now, the banks will have more incentive to lend out. Margin debt isn‘t contracting, but global liquidity hasn‘t gone pretty much anywhere in February. Coupled with the short-term dollar moves, this is hurting emerging markets more than the U.S. – and based on the global liquidity metrics alone, the S&P 500 is oversold right now – that‘s without the stimulus package. It‘s my view that we‘re experiencing … not a reversal of fortunes. … this remains one of the dips to be bought in my view.

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Monica Kingsley 1 month ago Author's comment

Yes, the meandering in stocks goes on, but I like the credit market performance thus far, and actually cautiously look for gold to surprise on the upside next - look how much of the intraday losses silver retraced already. Copper remains very positive, dollar very tame, and TLT treading water... That's a good setup.

Thank you, I hope you enjoyed the full article!