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S&P 500 steeply declined, yet the credit markets offered a glimmer of hope to suck in the bulls – and thus far, the premarket bounce is sticking. The fact that buying the dip didn‘t work in the 4,350s area, needs some digesting today – the overnight stampede didn‘t develop. The sectoral view though doesn‘t allow to declare the bottom to be in just yet. The technical bounce would be probably led by value, with tech lagging behind regardless of the anticipated daily stabilization / retreat in yields.
Neither the VIX has calmed down considerably yet. The bulls must be perplexed why buying the dip hasn‘t worked this time around (and before). The sizable open short profits can keep growing. As stated yesterday:
(…) VIX understandably calmed down [Wednesday], but doesn‘t give impression of yielding too much to the downside – on the contrary, it seems to be on a general uptrend since early Jul. Volatility is returning, and that‘s characteristic of the unfolding correction.
How far lower would it reach? The 4,340 followed by 4,300 and lower to mid 4,250 are the key supports. The bulls haven‘t (and face quite many headwinds from related markets, including the dollar) stepped in to close Tuesday‘s gap, which would be a game changer. For now, we‘re in a trading range where the bears have the advantage. The stock market bull hasn‘t topped, we‘re merely in an unpleasant correction, of which the daily upswing in utilities or consumer staples is a testament.
The key fundamental events Thursday were Powell acknowledging that pesky inflation and China ordering its state-owned enterprises to secure oil supplies for the coming winter at any cost. The former finally lit the fuse behind precious metals (did you see how profoundly silver recovered from that $8bn futures contract drop representing 40% of worldwide mining output before Powell spoke on Wednesday?), the latter keeps crude oil prices underpinned.
That‘s why I wasn‘t spooked by the copper plunge yesterday (really out of tune with the commodities sentiment and CRB Index performance) – the commodities superbull is merely getting started. Bringing up the key inflation thoughts of yesterday:
(…) The slowly but surely acknowledged inflation surprise will come back to bite the central bank as inflation expectations are finally surging again, reflecting the cost-push inflation (hello commodities superbull), job market challenges and increasingly strained supply chains characterized by order cuts, delays, shortages and general issues in getting merchandise where it‘s awaited (hello port congestion, docking plus trucking staff shortages and full container ships anchored and awaiting unloading). And I‘m not even talking record drought through the West Coast stretching into Rockies and Midwest, or China electricity rationing. Precious metals seem to be the most undervalued asset class these weeks really.
Once we look back at autumn 2021 a few short years down the road, we would all say that precious metals have been outrageously undervalued indeed. And have you seen the great crypto breakout that‘s making bulls such as myself very happy...
Let‘s move right into the charts (all courtesy of www.stockcharts.com).
S&P 500 and Nasdaq Outlook
S&P 500 pause is very clearly over, and the bears keep having the upper hand.
Credit Markets
Credit markets let the bulls have second thoughts, and the high HYG volume indicates a brief pause in the stock market selling.
Gold, Silver and Miners
Precious metals sprang to life – first swallow of a turnaround. The bottom looks to be in, and would be confirmed by silver increasing in price faster than gold in order to bring the gold to silver ratio back down from its 80 local top. Reinforcing that move would be copper catching up and outperforming the CRB Index too.
Crude Oil
Crude oil consolidation continues, and every dip is being bought. Upswing continuation appears a question of time only.
Copper
Copper downswing could have attracted higher volume but that doesn‘t detract from a vigorous response of the bulls coming most likely next. The pattern of lower highs is likely to be broken to the upside the cryptos way (discussed next), in due time.
Bitcoin and Ethereum
Bitcoin and Ethereum bulls confirmed they were on the move, and the early Sep highs are next in their sights. The chart is very bullish, and the daily indicators have plenty of room to go before reaching overbought levels.
Summary
Stocks aren‘t out of the woods yet, but the bears are likely to take a daily pause today. Inflation is coming back into focus, today‘s core PCE price index confirms it isn‘t going away any time soon, and Treasury yield spreads (10-year over 2-year) are coming back from the false breakdown earlier in Sep, which would feed into the hunger for commodities.
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