Friday's great run gave way to yesterday's consolidation, and stock bulls appear in need of more before taking out the psychological 4,000 mark. The Archegos crash isn't causing contagion fears the way GameStop (NYSE:GME) did in late January. The current volatility and put/call ratio simply doesn't reflect that.
The theme is still one of reflation – while inflation expectations are rising, and so are the inflation data for those who care to examine them closely enough. Tue inflation isn't yet here. Markets are merely transitioning to a higher inflation environment, not buying the Fed's transitory explanation. Commodities are basing at the conquered levels before another run higher.
Make no mistake though, the current S&P 500 upswing is heavily reliant on the defensive sectors. Technology isn't standing in the way, utilities and consumer staples are doing great, and so are several areas within the real estate sector, like residential, or REIT ETFs, which can be expected to keep doing well. Couple that with value stocks not really retreating, and you get the current view of the S&P 500 advance structurally.
Credit markets, though, are lagging behind, thanks to the return of rising yields. Such were my points from my analysis yesterday:
(…) With 10-year Treasury yields at 1.67%, last week's decline didn't reach far before turning higher. Remembering stock market woes that the first breach of 1.50% caused, stocks have coped well with the subsequent run up. In the old days of retirees actually being able to live off interest rate income, a level of 4% would bring about trouble for S&P 500, now the level is probably just above 2%. Yes, that's how far our financialized economy has progressed. I look for volatility to rise, and stocks to waver and likely enter a correction at such a bond market juncture.
It's a question of time when gold starts anticipating the policy turn. We have quite a few decoupling signs, some on prolonged basis, but gold isn't yet leading commodities the way it did both before and after the corona deflationary shock.
Let's not forget about the currencies and arbitrage opportunities there – the yen carry trade is still very much alive, making it a no-brainer to borrow in declining currency, while parking the proceeds elsewhere. And the one-way trading in USD/JPY in 2021 is a fitting testament thereof. It's a powerful argument against deflation on our doorstep, by the way.
Quite to the contrary at the moment – both commodities and precious metals were under pressure in today's premarket session. Another undoing of the miners‘ outperformance?
Let‘s move right into the charts (all courtesy of www.stockcharts.com).
Gold in the Spotlight
The daily resilience in the miners would come under heavy pressure today, and GDX (NYSE:GDX) can be expected to close lower. Would they still show outperformance vs. the yellow metal? I wouldn't bet the farm on it.
Miners to gold (black line) still keeps painting a bullish picture on the weekly chart, as it refuses to follow the yellow metal to the downside. Where would it be should the $1,670 support zone get tested again? Would that level be sufficient enough to power a rebound?
Silver, Miners And Copper
Silver clearly illustrates the sectoral weakness. The selling waves get harder to repel, and upswing attempts are happening on lower volume. While copper goes sideways, the white metal is breaking lower, and miners are not showing any strength.
Summary
The S&P 500 keeps consolidating Friday's gains without signs of upcoming, groundbreaking weakness. With volatility at around 20, the path of least resistance remains overall higher – until tech says no more. Again, no hint of that today, however.
Gold is again approaching the $1,670 support, and miners' performance will send valuable clues just as before the March 8 bottom. Given today's downswing, which will be an even more important indication.