After disappointing first-quarter growth, the American economy may be in the throes of a massive bounce-back.» Read More
Bond yields are destined to go higher—the only real question is how quickly.
It's been 15 days since the 10-year yield printed its 2.75 percent high. At that point in time, it was clear that Chairman Ben Bernanke was alarmed by the volatility and dramatic price action caused by the mere mention of the taper. After an aggressive, Fed-wide backpedal, they've been able to contain volatility and engineer stability.
My belief is that the Fed doesn't want long-term rates to go much lower than current levels, for fear that it could put us right back where we were a couple months ago, and create the potential for market shocks. So on Wednesday, I believe we will get mild taper talk which will move the market in the direction of the July 5th high in yields.
(Read more: Wall Street pros: Fall taper priced in...sort of)
Even though we are seeing record supplies for crude oil, and China's growth is moderate at best, the crude market has held up fairly well over the last few weeks. So what gives?
First of all, we have unrest in Egypt once again. In addition, we are in the peak of driving season, which historically has been bullish for crude demand and oil products.
(Read more: Egypt's Brotherhood stands ground after killings)
Corn, wheat and soybean futures are all trading at 52-week lows, with corn dropping over 30 percent on the year. But that doesn't mean consumers should budget less for English muffins or movie popcorn.
"It translates less than you would think," said Scott Nations of NationsShares and a CNBC contributor. "The cost of wheat that goes into the price of bread is relatively minor, compared to the price of the loaf."
This year's commodity crush came after a 2012 drought put severe pressure on crops, reducing supplies and spiking prices. As weather has been more favorable this year, record crop yields have been expected, and this has pushed prices down. But some back-of-the-envelope math tells us why this won't be noticeable at the supermarket checkout.
"As a rule of thumb, gross margins for food companies are in the 25-to-30-percent range, so that gives you an idea of what the cost of goods sold is" Jefferies analyst Thilo Wrede told CNBC.com. "And if the cost of goods sold is 65 to 70 percent of revenue, then input costs are half of that. And of those inputs, the biggest is energy—natural gas for cooking and for packaging, and oil for distribution. So grains are maybe 5 to 10 percent of cost of goods sold, depending on the company."
For that reason, while "you do you see a connection between input costs and costs on the shelf," grain prices don't have a huge impact on packaged food prices or on the performance of food stocks like General Mills or Kellogg, Wrede said. In fact, "it's really energy prices that you have to watch," according to the analyst.
Will the S&P overtake 1700? With so many major stops above that level, a test is almost guaranteed.
Equities are trading well below highs Friday morning, on worries that the planned stimulus coming out of Japan may not meet expectations. Consumer Price data out of Japan beat expectations and showed the biggest jump since 2008, causing the yen to rally more than a point.
We all know that a stronger yen puts pressure on the equities market, as traders look for a risk-off trade. We are seeing a flight to bonds this morning as a safety trade heading into the weekend.
(Read more: At last, inflation in Japan is speeding up)
The S&P traded to a high of 1689 on Thursday night before selling off more than 10 points. The market found resistance at the 1686 to 1687 level, trading to a high of 1686.50. A close above here will be needed to provide bullish momentum into the close. Meanwhile, a fall back and close below 1681 will be discouraging to the bull camp.
Janet Yellen will be the next chair of the Federal Reserve, and the bond market will love it. At least, that's the case made by Tony Crescenzi, an executive vice president, market strategist and portfolio manager at Pimco.
Chairman Ben Bernanke is widely expected to step down when his term ends in January. Speculation was all but confirmed when President Barack Obama told Charlie Rose on June 17 that "Ben Bernanke's done an outstanding job" but "he's already stayed a lot longer than he wanted to or was supposed to."
So who will the next chair be?
"It can't be known," Crescenzi said on Thursday's "Futures Now," but "the odds are highly in favor of Janet Yellen to be the first woman Fed chair" on the strength of "all her experience at the Fed."
Since October 2010, Yellen has been vice chair of the Fed's Board of Governors. She had previously served as the president of the Federal Reserve Bank of San Francisco.
The case for Yellen may have gotten another boost from a letter going around in the Senate. Signed by a third of the Senate's 54 Democrats, it urges Obama to appoint her, The Wall Street Journal reported late Thursday.
Crescenzi believe that the bond market also would be a fan.
"The bond market would probably rather have Janet Yellen in place, with her vast experience at the Federal Reserve," he said. "She would probably keep in place the transparency effort of the Fed, and also its communications efforts. As well, it looks like she would likely continue Ben Bernanke's program."
Crescenzi added, "There are too many uncertainties regarding the other candidates," so choosing on of them could mean "extra yield that investors demand for bonds," and "it would mark equities down."
We are in the middle of earnings season, and by most accounts, results have been good. Of the 233 S&P 500 companies that have reported, 68 percent of them have beat their earnings estimates, which is above the historical average. So why isn't the market trading higher?
There are two key reasons, in my view. The first is that expectations have been scaled back so dramatically. This means that even though companies are beating expectations, this is not exciting investors, because the bar has been set low.
Second, investors clearly anticipate that the Federal Reserve will soon scale back asset purchases, and that has caused some folks to take profits off the table. Many investors think the Fed is the only thing holding this market up, and whether this is right or wrong, that it is the perception.
How quickly things change. Gold's critical $1,300 level, which once served as resistance, is now support.
Although it matched the previous session's $1,348.70 high, gold failed to make a new high and stalled out against our $1,351.40 resistance level very early in Wednesday's session. Thursday is August option expiration, and as clocks tick, we are seeing a similar pattern to one we saw in April. Back then, when gold broke down through $1,500 and reached down to $1,323 before bouncing, many put option sellers found themselves with serious losses, and they were forced to either cover puts or buy futures to close the option position. This caused a quick bounce, and strong price action in gold.
(Read more: Why Detroit is good for gold: Ron Paul)
Bill Fleckenstein is a well-known bear on the market, and he has long been on the record claiming that stocks are overpriced and the market is due for a drop. But that doesn't mean he'd recommend being short. Actually, he says that shorting stocks has become all but impossible.
"Bad news doesn't really matter, and you can't really be short, because the Fed is putting in all this money," Fleckenstein said on Tuesday's "Futures Now." "It's been very difficult to see stocks decline—even bad news is pretty much shrugged off."
The contrarian says recent trading in stocks that reported below-consensus earnings is extremely telling. "We've had quite a lot of weak numbers emanating from big tech stocks, and it hasn't really done that much damage," Fleckenstein said.
For instance, while Google's Thursday earnings disappointed the market, and caused the stock to open 4 percent lower, buyers throughout the rest of the day and over the days following brought the stock back nearly exactly to where it was.
In a different sector, Coca-Cola's weak numbers led that stock to open 3 percent lower—before those shares, too, bounced back.
Gold bugs are zeroing in on $1,370. And with good reason: That will be the critical level for the metal in this week's trading.
Gold showed tremendous strength late in the day on Tuesday and into New York's CMX floor close, pressing the market through new highs and reaching $1,348.70. The rally also coincided with a lower-than-expected yield in a two-year auction, which also provided support to the treasury market, and signaled a move toward safety.
(Read more: Why Detroit is good for gold: Ron Paul)
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