Yesterday‘s recovery ended on a weak note as stock bulls gave up the opening gap. Disappointing in the very short run, especially given that other key markets were likewise weak. Neither corporate bonds, nor gold, nor oil could get their act together, and are hanging in the balance. Inviting the bears to probe the defences, how far south will they be able to get?
We have the Fed meeting today, and while I am not looking for hawkish surprises or any outright optimism, the investors aren't taking chances. Sell now, ask questions later seemed to be the mantra before the U.S. open.
While Monday‘s hanging man candlestick predictably didn‘t bring follow through selling on Tuesday, I am looking for the bulls to get tested today. Once the dust clears, we can go on making new highs, but the short-term storm (storm in a teacup, more precisely) hasn‘t started yet.
Today, I‘ll examine the S&P 500 standing, look into precious metals, and finally answer a pointed question about gold.
Let‘s start (charts courtesy of www.stockcharts.com).
S&P 500 Outlook
Stocks are hanging in the short-term balance following yesterday‘s weak close. Unconvincing volume, inviting a premarket push to the low 3800s as we speak. The aftermath of the Fed will set the tone for the coming sessions, but I would look for early credit market clues before buying any dip.
Credit Markets
High yield corporate bonds (NYSE:HYG) ETF) had a weak day yesterday, missing the opportunity to rise. Quite to the contrary, they traded relatively weaker than the S&P 500 did. Any time corporate bonds start underperforming stocks, I am watching closely, and often from the sidelines.
Investment grade corporate bonds (iShares iBoxx $ Investment Grade Corporate Bond (NYSE:LQD) ETF) closed about unchanged, while Treasuries paused and didn‘t really advance compared to Monday. They appear waiting for the Fed, unwilling to move before discounting possible hawkish surprise (positive assessment of the economy would do that trick) as a false alarm.
The ratio of high-yield corporate bonds against short-term Treasuries (HYG:SHY) with the S&P 500 overlaid (black line) shows the very short-term vulnerability in stocks. How low will these go as the greed sentiment gets taken down a notch?
You see, yesterday I did strike an optimistic tone in the runup to the regular session's open, but the bulls missed a good opportunity to act, and the resultant signals favor the bears to step in now. That‘s the essence of my trading style – neither a perma-bull, nor a perma-bear, and always ready to turn on a dime should the facts change.
The market breadth indicators show we're on the doorstep of a push lower. Instead of holding ground, new high new lows solidly declined, while both the advance decline line and advance decline volume muddled through. That‘s not exactly a bullish constellation.
Precious Metals In Focus
Gold also appears to be acting a bit weak in the short run. No surprise as I don't see the lengthy consolidation as quite over yet. This one will more likely wear you out than scare you out. Simply put, the gold bulls better wait for spring to usher in another precious metals upleg as the miners to gold ($HUI:$GOLD) ratio isn‘t sending any kind of confirmation that the sector has made a turn.
The gold-to-silver ratio keeps treading water, and isn‘t declining below its early September lows. On the other hand, it‘s not trading too far from them either, which translates into silver not acting at its weakest exactly. That‘s a bullish sign, showing that this 5-month long consolidation is really getting long in the tooth.
Completing the picture, miners (GDX (NYSE:GDX) ETF) reveal lackluster short-term performance. Long upper knot and volume as low as could have been, mean that we better brace ourselves for a down session today.
Summary
Time has come for another daily downswing in stocks, and it remains to be seen whether it entices the buyers to act. Technology, communications and consumer staples were among the best performing sectors yesterday, which doesn‘t paint a picture of broad short-term strength. Repeating the final sentence of yesterday‘s summary, the nearest days may (see today‘s session for proof) bring another push lower that won‘t however jeopardize the bull market in the least.