Buy The Dip, Again?!

S&P 500 attempted a breakout but retreated. Is that a reversal, or proof of more pressure building up? Much starker move in the high yield corporate bonds would speak in favor of a reversal, but only until the higher end of the debt markets is examined. Or the volume for that matter, as these would put the reversal hypothesis to rest.

VIX continues turning lower, and options traders are getting the message – finally, the put/call ratio appears to be on a declining path, meaning that fewer market participants are expecting another shoe to drop. As if one fell in the first place, really. Is that the worst of the inflation scare being over, for now? Probably yes, and the retreating Treasury yields are mollifying – but as explained in ample detail, this calm before the (autumn) storm, is deceptive. Calling the Fed‘s bluff, precious metals (and some commodities) are onto something, really.

One more proof why the stock market bears are at a disadvantage comes from other indices, namely the Russell 2000 (look for value to benefit), and emerging markets. The magic of ample Fed support is making its way through the system, lifting prices in many asset classes amid still rampant speculation. It‘s only the cream of select commodities that has been taken off – in the big scheme of things, nothing but a consolidation within an existing secular bull market, is happening there. While the inflation trades have been dialed back to a degree, they haven‘t been broken as the Fed is in a reactive, not proactive mode. More precisely, it remains in denial of the inflation ahead.

Gold is holding up strongly and has been in little need of miners‘ support lately. Both are consolidating, readying for another push higher that would coincide with a further retreat in long-dated Treasury yields – unless these are counterbalanced with the collapse of inflation trades. Once again, I am not looking for that to happen – soft patch, prolonged commodities consolidation yes, turn to deflation no. In such an environment, silver would have a tougher ride and be vulnerable to volatile swings defined by how the inflation, yields, expectations, and Fed action bets play out.

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