The mid-Feb bearish gap has been closed, and the S&P 500 is getting ever closer to the Feb all-time highs. The outlook for markets on my radar screen is shining quite brightly too. So, what stands in the way of overcoming those Feb highs?
The jobs data do not paint an entirely positive picture. Wednesday's ADP non-farm employment change fell way short of expectations, and stocks shook it off. Yesterday's new and continuing unemployment claims showed an improvement, and stocks dutifully rallied. Which way will the effect of today's non-farm payrolls go?
Fundamentally, I look for the figures to rather disappointing in the big scheme of things. But this isn't about trading any number, and stocks might take a cue from their Wednesday's performance. Despite the encouraging look of the weekly chart (the white candle on volume that is likely to surpass preceding week's one once today's closing bell rings), the bulls better remember about risk management and are ready for the scenario of a noticeable upper knot appearing on the weekly candle.
The following big picture view holds true also today. The jobs data will underscore:
(…) the pain real economy feels and its tenuous path to recovery. No knee-jerk reaction (…) means the markets aren't willing to take that seriously just yet (are they betting this soft patch would be gone?).
S&P 500 in the Short-Run
I’ll start with the daily chart perspective (charts courtesy of http://stockcharts.com ):
There is no debating the breakout above the early June highs, and the volume examination keeps favoring the bulls. The respectable volume with little intraday volatility is an ally of upcoming higher prices.
Yes, the daily indicators are increasingly extended, and it's not about the RSI merely. A breather that would coincide with temporarily lower prices, would be both refreshing and healthy for another upleg.
So, we have these days' bullish price action and extended daily indicators as prices are approaching the Feb highs against the stimulus negotiations that are dragging on, and many a real economy sector's pain out in the open.
Should a correction strike, and take out the bulls such as myself again profitably out of the open position, it's imperative to assess the downswing's internals, whether it is or isn't turning into something more serious and not merely temporary.
Let's check the credit markets next.
The Credit Markets’ Point of View
High yield corporate bonds (HYG ETF) rose again, and this time more noticeably than on Wednesday (please see this and many more charts at my home site). The volume moved even more down though, which could mark a short-term indecision ahead.
Regarding these two ratios, my Wednesday's credit market observations are relevant also today:
(…) What a great sight as both leading credit market ratios – high yield corporate bonds to short-term Treasuries (HYG: SHY) and investment-grade corporate bonds to longer-dated Treasuries (LQD: IEI) – are supporting each other's upswings. One day the former has the baton, the next day the other leads. The direction is clear, enabling higher stock prices.
The overlaid S&P 500 closing prices (black line) is increasing its relative distance from the HYG: SHY ratio. Stocks indeed seem more than willing to lead, thus sending a message of the bull run having still a way to go.
Leading up to the gold part of today's analysis, let's recall the below notes about this stock bull run:
(…) So far, the propping efforts to bridge the mini-depression are working. The recovery off the March lows has been among the strongest ones when looking at all the WWII stock market rebounds that have made it past the 61.8% Fibonacci retracement. We're still in the "everyone benefits and no one pays" stages of inflation. The canaries in the coal mine flashing danger (hey, this can't last forever) are gold and the dollar.
Calling Out Gold
The daily gold chart reveals daily rising prices with Swiss clockwork precision since mid-July. The key question is how sustainable is the move that brought the yellow metal both above the 2011 all-time highs above $1,920 and breached the $2,000 handle.
It's beyond obvious that the daily indicators are heavily extended. The bulls are though still able to reach out for new highs practically on a daily basis – it's the upper shadows of recent candles that raise the odds of the bears interfering with the bullish ride.
The yellow metal is the strongest performing part in the precious metals arena – while silver is catching up mightily (thus bringing the gold to silver ratio back to its 2016-2018 range), it's nowhere near its own all-time highs, and neither are the gold miners.
Let's check the dollar – how does the anti-gold's performance look like?
The greenback has been plunging to new 2020 lows for many weeks recently. Since spring, I have been calling for the dollar to roll over, and comparing the 2008 gold selloff to the March deflationary episode on June 22 in the article titled The S&P 500 Wall of Worry Got Steeper on Friday – please see the From the Readers' Mailbag section.
Yes, I think that the great discounted entry opportunity is behind us. But that doesn't mean gold won't move lower. Barring a true liquidity crunch with a black swan accompanied by a steeply rising USDX, such downswing wouldn't get too far (as in plenty of hundreds of dollars) in my opinion.
The dollar chart shows there is a potential for the dollar bulls to come alive to a certain degree though. In the current environment of indiscriminate money printing as far as the eye can see (the corona hockey stick is first of its kind, putting QE1 to shame), how far would the dollar make it? Regardless of any precise number, that would likely usher in a soft patch in gold.
Correlation of gold to the greenback changes over time, both in its strength and in its direction, making it worthwhile to zoom out and connect the dots. That's exactly what the following chart with its exhaustive caption does:
The Q2 and Q3 2018 bear in gold was vicious, coinciding with Fed hiking rates. The tightening policy (yes, those distant days of shrinking Fed balance sheet) was being increasingly called into question, and the December 2018 FOMC was the last hooray of the hawks.
As you can see, the gold market called the bluff earlier, and as the central bank turned rather neutral, the yellow metal posture was turning increasingly bullish in late spring 2019. Both gold and the dollar were rising at the same time over the summer. The next key event was the repo market turmoil in autumn 2019, and it saw gold declining as the Fed injected liquidity. The can was kicked further down the road.
The real economy seemed strong, yet deteriorating credit markets against new S&P 500 highs in February 2020 showed that appearances can be deceiving. Gold welcomed the uncertainty, and after overcoming its March selloff, it reacted to Fed balance sheet expansions and very unorthodox monetary policy almost as much as it did back in the 1970s when money aggregates mattered more than in our MMT era.
The key thing though is that since its August 2018 bottom, gold amplified each setback the dollar met. The current pace of advance shows just how much it anticipates the inflation in the pipeline to hit. And that's precisely what makes it vulnerable in the very short-term.
What I miss though, is a credible catalyst to bring it down considerably. My June 22 expectations of its bright future are still valid, and I expect the yellow metal to move to new highs sooner rather than later.
Yes, I look for any potential selloff to be brief and shallow, retracing a mere portion of this summer's gains. Consider yourself blessed if it reaches beyond these levels.
Summing up, the S&P 500 upswing goes on with the full support of the credit markets. As technology assumed the sectoral rotation leadership, the S&P 500 market breadth deteriorated – but both the small-caps and emerging markets are largely standing their ground. The bulls remain well-positioned to overcome the incoming jobs market data trepidations and welcome the stimulus cheerfully.
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