Meeting resistance

S&P 500 reversed Friday‘s decline, closing below 3,680 – the session was relatively tame, and it was the banking earnings that were instrumental in extending gains aftermarket. Little wonder with such yield spreads – even Cramer then called financials the new stars. While bonds were risk-on, outside markets can‘t be considered as nodding to this S&P 500 rally. Long-dated yields are still rising, and the HYG upswing is likely to run into the Fed still to tighten significantly in Nov and Dec bets as the short end of the curve shows.

Also, far from all earnings ahead this week would allow for such risk taking appetite. Baltic Dry Index is having trouble rising further, and that reflects weaker retail demand ahead. While the consumer is still strong for now, my yesterday‘s thoughts as to earnings and sectoral strength, still apply:

(…) there are still some bright spots in earnings ahead – the tech midcaps seem to be improving, financials didn‘t have a poor week – but above all, healthcare isn‘t looking bad at all. Energy stocks are still on fire, and will be even more. It would be the defensives (utilities and consumer staples) together with communications, that would be lagging ahead.

The S&P 500 relief rally hasn‘t yet reversed, but it‘s hard to get excited about it unless it breaks 3,795-3,810 zone with conviction and confirmation. Bonds look very extended in the risk-on direction, and neither commodities nor precious metals exhibit the same risk appetite, not in the least. While VIX can (and will based on today‘s move) move lower, I favor more selling to appear as we approach the above meaningful resistance zone – put to call ratio is getting to complacent levels slowly but surely.

Thursday‘s Philly Fed data is likely to surprise on the downide, housing would continue to cool, and unemployment claims to rise – these are all leading or coincident indicators while CPI is a lagging one. Hard to derive any other conclusion that the Fed would overdo it on tightening (by looking into this rear view mirror, in the steepest pace of monetary policy change since the mid 1990s). Even if they were to pause now, the effects of tightening already in would take 12 months at least to manifest in full. Hard landing is virtually baked in the cake as the Fed is less sensitive to asset price gyrations than it was in Dec 2018.

This is why I can‘t be bullish at this stage, not when I see bonds pressuring the Fed to do more, when bonds are still disregarding the weakening real economy – Thursday‘s data would be the revealing catalyst of how far this relief rally off the CPI Thursday got ahead of itself.

Precious metals and commodities are in the process of turning, and out of them all, I am of course still most bullish oil, followed by silver (due to outperform in the not too distand future) and copper. Until though the Fed monetary policy / job market catalyst arrives, prolonged basing can be expected – inflation focus going out of the main window, is what‘s required for steep gains again.