Bulls Coming To Terms With Inflation

Bulls had to fight hard to recover from intraday downside, and hadn‘t managed to close the menacing gap at the open. The VIX gap remained unchallenged too, but the volatility metric soundly retreated from its daily highs, and not even the option traders did add to their bearish bets. The tide seems to be in the early stages of turning as technology caught a solid bid and the behemoths didn‘t disappoint on a daily basis. Growth not lagging as badly is essential to the 500-strong index, but look for it to keep underperforming value.

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While a lot more needs to be done, the strongest sign of bullish resolve has come from the Russell 2000 and emerging markets. Both welcomed the continuing dollar woes, and faced off with the rising rates that would ultimately cut into their profitability – much further down the road. Let‘s put my yesterday‘s words into perspective:

(…) Neither the small caps, nor the emerging markets, let alone S&P 500 fell on sharply rising volume, which speaks in favor of a bad day, chiefly driven by tech (yes, I‘m looking at you, $NYFANG) and weak credit markets. Look at market breadth – new highs new lows stunningly rose yesterday in spite of the 500-strong index losing quite a few dozen points.

Classic risk off positioning, if only the defensives as a group did a lot better – but it could have been worse had commodities joined in the melee. They didn‘t, and they are thus the dog that didn‘t bark, detracting credibility from yesterday‘s stock market plunge (unless they catch up next, that is).

The key points are improving corporate credit markets and commodities rejecting more downside (with the exception of lumber). Copper still keeps doing great, confirming my assessment that this would turn out as another buying opportunity.

Gold, silver and miners stood the test, and remain consolidating at the high ground gained. Real rates turning more negative are their powerful ally, which explains why the rising nominal yields haven‘t exerted lasting selling pressure. Miners are by no means lagging behind, and silver isn‘t getting as overheated so as to put the precious metals upleg into danger, and neither are the USD/JPY move consequences (still positive on a daily basis). The sizable open gold profits will continue growing in all likelihood.

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