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.

Image source: Pixabay

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.

Overall, we seem to be having a risk-off move in stocks not spilling over to commodities, precious metals or cryptos, all driven by the growing inflation threat – the market is getting attentive again. How long before it forces the Fed to talk, act and not play ostrich? The evidence isn‘t strong thus far, but there is a lot of time left till the Jun Fed meeting. Needless to say, bold moves would crater risk-on assets, which is why I‘m not expecting any real action yet with the 10-year yield at 1.64% only. CPI may force them as much as it wants today, but that won‘t do the trick as I just tweeted.

Crude oil remains underpinned in the very short run by the Middle East tensions and the Colonial Pipeline shutdown, making for a positive technical outlook and rising open oil profits.

Among cryptos, Ethereum keeps doing fine without any meaningful pullback or deceleration, but Bitcoin remains choppy around its flat 50-day moving average. The rising support line connecting its Apr and May lows better hold as the risk of extending losses should prices break below $56,300 roughly, is very real and would coincide with e.g. Ethereum taking a breather.

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

S&P 500 Outlook

No daily volume indicative of a true reversal, and market breadth indicators turning deeply negative – such are the consequences of value stocks participating in yesterday‘s sell-off. Repeating yesterday‘s notes, deceleration of the daily declines accompanied by a lower knot ideally would be the first sign that I would be looking for – alongside a positive turn in the credit markets. And we‘re near to getting both.

Credit Markets

High yield corporate bonds made at least some attempt to close the bearish daily gap, and the volume doesn‘t say it was a desperate attempt. Contrast that with the quality debt instruments, and you see risk-on seeking to return.

Technology and Value

Technology bleeding stopped yesterday, yet didn‘t bring about a broader rally. We‘re still waiting for both growth and value to pull in the same direction – for that though, the market has to cope with the inflation fears first though.

Gold, Silver and Miners

Gold and miners keep aligned in a strong position after yesterday‘s downswing was rejected, and it is precisely the 10-year yield lagging woefully behind the inflation expectations this week why the rising nominal yields aren‘t a credible threat.

Silver daily outperformance isn‘t too worrying, not even should it be fully retraced next – the copper to 10-year Treasury yield ratio keeps moving in support of the precious metals upleg. We aren‘t crashing into deflation – the markets are once again facing the high inflation reality.

Crude Oil

Crude oil bullish consolidation is in its latter stages as the rising volume heralds. Look for the uptrend to reassert itself next.

Summary

S&P 500 recovered from heavy intraday selling pressure, and both tech and credit markets appear to be turning. Once the market comes to terms with the rising inflation and stops worrying about a Fed response this early, stocks would take on the recent highs once again.

And that includes Nasdaq as the $NDX outlook has flipped bullish throughout yesterday‘s recovery (I hope the bulls were taking advantage – it‘s not too late to do so now).

Gold, silver and miners keep chugging along, and the sound rejection of lower values bodes well for the short-term. The only question remains how much base-building do we have still ahead before the next upswing, amply supported by the negative real rates.

Crude oil bulls look to have no more waiting in front, and amid the headlines arriving, I look for black gold to close solidly above $66 before the week is over.

Bitcoin is still hesitating while Ethereum runs, presenting a potential vulnerability in its mostly neutral to bullish short-term outlook. I specifically don‘t like the upside rejection of today, thus striking a cautious tone.