The elephant in the room

S&P 500 is starting to run into a setback even if VIX doesn‘t reveal that fully. Credit markets going from weakness to weakness spells more short-term woes for stocks – a shallow downswing that feels (and is) a trading range before the surge to new ATHs continues, is likely to materialize in the second half of Nov. We may be in its opening stages – as written yesterday:

(…) Can stocks still continue rallying? They look to be setting up for one more down leg of the immediately preceding magnitude, which means not a huge setback. The medium-term path of least resistance remains up – the Fed is still printing a huge amount of money on a monthly basis, and it remains questionable how far in tapering plans execution they would actually get – I see the risks to the real economy coupled with persistently high inflation as rising since the 2Q 2022 (if not since Mar already, but most pronounced in 2H 2022).

Stocks are still set for a good Dec and beyond performance.

The elephant in the room is (the absence of) fresh debt issuance lifting up the dollar, making it like rising yields more. Not only that these are failing to push value higher, but the tech resilience highlights the defensive nature of S&P 500 performance. Crucially though, precious metals are seeing through the (misleading dollar strength) fog, and are sharply rising regardless. Make no mistake, with the taper reaction, we have seen what I had been expecting (or even better given that I prefer a reasonably conservative stance without drumming up expectations either way) – I had been telling you that the hardest times for the metals are before taper.

And the magnitude and pace of their upswing cast a verdict on the Fed‘s (likely in)ability to follow through with the taper execution, let alone initiate the rate-raising cycle without being laughed off the stage as markets force these regardless of the central planners. The galloping inflation expectations are sending a very clear message:

(…) if you look at the great white metal‘s performance, it‘s the result of inflation coming back to the fore as the Fed itself is now admitting to high inflation rates through the mid- 2022, putting blame on supply chain bottlenecks. Oh, sure. The real trouble is that inflation expectations are starting to get anchored – people are expecting these rates to not go away any time soon.

Precious metals are going to do great… Copper is awakening too, and commodities including oil would be doing marvels. TLT downswings would be less and less conducive to growth, so if you‘re still heavily in tech, I would start eyeing more value.

Let me add the Russell 2000 and emerging markets to the well-performing medium-term mix.

Let‘s move right into the charts.

S&P 500 and Nasdaq outlook

S&P 500 bulls didn‘t make it too far before running into another (mild, again I say) setback – so far, a sideways one.

Credit markets

Credit markets renewed their march lower, and unless they turn, the S&P 500 upswings would remain on shaky ground (if and when they materialize).

Gold, silver and miners

Gold and silver remain on a tear, and even for the breather to unfold, it takes quite an effort. The bears clearly can‘t hope for a trend change.

Crude oil

Crude oil bulls keep defending the $80 level, with $78 serving as the next stop if need be – these consecutive lower knots keep favoring the bulls, just when the right catalyst arrives. Whether that takes one or two days or more, is irrelevant – it will happen.

Copper

Copper ran into an unexpected setback, which however doesn‘t change the outlook thanks to its relatively low volume. I‘m still looking for much higher red metal prices.

Bitcoin and Ethereum

Bitcoin and Ethereum are seeing an emerging crack in the dam that doesn‘t tie too well to developments elsewhere. The bulls should step in, otherwise, this yellow flag risks turning into a red one.

Summary

S&P 500 bulls are now holding only the medium-term upper hand as the rally is entering a consolidation phase. Anyway, this trading range would be followed by fresh ATHs, which would power stocks even higher in early 2022. Precious metals have quite some catching up to do, and the long post-Aug 2020 consolidation is over. Copper, base metals, oil, and agrifoods are likely to keep doing great as inflation expectations show that inflation truly hasn‘t been tamed in the least.