S&P 500 Correction – No Need To Hold Onto Your Hat

Yesterday‘s bearish price action in stocks was the kind of shallow, largely sideways correction I was looking for. Not too enthusiastic follow through – just rocking the boat while the S&P 500 bull run goes on. Stocks are likely to run quite higher before meeting a serious correction.

As I argued in yesterday‘s detailed analysis of the Fed policies, their current stance won‘t bring stocks down. But it‘s taking down long-term Treasuries, exerting pressure on the dollar (top in the making called previous Monday), and fuelling commodities – albeit at very differnt pace. The divergencies I have described yesterday, center on weak gold performance – not gaining traction through the monetary inflation, instead trading way closer in sympathy with Treasury prices.

Gold has frontrunned the other commodities through the corona deflationary shock, and appears waiting for more signs of inflation. It didn‘t make a final top in Aug 2020, and a new bear market didn‘t start. It‘s my opinion that thanks to the jittery Treasury markets, we‘re seeing these dislocations, and that once the Fed focuses on the long end of the curve in earnest, that would remove the albatross from gold‘s back.

I can‘t understate how important the rising yields are to the economy (and to the largest borrower, the government). Since 1981, we‘ve been in one long bond bull market, and are now approaching the stage of it getting questioned before too long. The rates are rising without the real economy growing really strongly, far from its potential output, and characterized by a weak labor market. Not exactly signs of overheating, but we‘ll get there later this year still probably.

It‘s like with generating inflation – the Fed policies for all their intent, can‘t command it into happening. The Treasury market is throwing a fit, knowing how much spending (debt monetization) is coming its way, and the Fed‘s focus is surely shifting to yields at the long end. Bringing it under control would work to dampen the rampant speculation in stocks, and also lift gold while not hurting commodities or real economy recovery much. Sounds like a reasonable move (yield curve control), and I believe they‘re considering it as strongly as I am talking about it.

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Monica Kingsley 1 week ago Author's comment

This is a sequel to yesterday's very special analysis - please check it out if you haven't done so already. Today, I am taking aim at the Fed likely actions next given the late stage of the bond bull market. How long will the gold dislocation last? More on silver, stocks and the ever elusive repeat of a deflationary episode. Stocks and metals are now recovering from their intraday woes, and it's taking time. Stocks will have a smoother sailing than the metals. Look at TLT's currently making new 2021 lows, and compare to gold scoring modest gains today, leading silver. The bullish case isn't lost - and once it is, my readers evrywhere will be the first to know.