Below is a copy of a free eLetter that is meant as an introduction to NFTRH. A sort of NFTRH-lite if you will, which highlights a few of NFTRH’s themes in a less detailed manner 3 or 4 times a month. This week the eLetter was written in more detail with the idea that it would also make a good Interim Update for premium subscribers.
We have already covered much of what is below, but I want to call your attention to silver, especially. I have widened the support zone, playing devil’s advocate with the idea that we should be prepared for anything. Being a chart geek, I am nagged by the potential of an over sold weekly RSI to become ‘equal and opposite’ to the over bought hysterics of 2011.
This is just potential mind you. But it is my job to bring you everything I see and consider. Not just what feels good for the analysis or for any favored stance. The best cure for this caution would, as previously noted, be a strong move to the upside by the precious metals complex breaking the flags and making a bottoming statement.
‘Taper to Carry’ (T2C) Still on Track
Interest rates continue to stair-step higher on the long end of the Treasury curve and the banking sector continues to out perform in accordance with the theme we have had in play since 10 and 30 year yields first broke up from a bottoming pattern at the same time as the BKX-SPX ratio broke upward through resistance (now support). Here is the updated chart for reference:
While I sold personal positions in the regional banking sector due to over bought conditions the banks vs. the S&P 500 as an indicator is alive and well. The implication continues to be that yes indeed the Fed can and likely will taper their bond ‘asset’ purchases while maintaining the now taken for granted and inflationary ZIRP on the Fed Funds Rate. Here is an extensive NFTRH excerpt with more on this: Rates of Interest and here is a simpler post showing one sector benefiting (Banks) and one hurt (Housing) by T2C.
Stock Market Bullish But Becoming Over Bought
We had been planning for a summer correction for the US market and indeed the S&P 500 topped out in May and declined hard in June. While a bounce and resumed decline was expected, the prospect of a renewed decline was then mitigated by the fact that junk bonds were declining less than Treasuries and investment grade corporates, as we noted in NFTRH at the time. This was a positive (speculative) divergence and when the recent market bounce took out certain resistance parameters we were forced to seriously question ‘was that it?’ for the summer correction.
Market leaders like the Small Caps and Semiconductors are generally at new highs for the bull move from November, although the Semi’s got dinged yesterday likely due to Intel’s PC-related issues. But as sharply recovering junk bonds will attest, risk has been turned back ‘ON’ thanks to benevolent and inflationary policy making.
Precious Metals & Commodities
Well if it is so inflationary, why are the precious metals struggling so mightily to bottom and commodities so well contained (outside of crude oil)? One explanation is that the freer aspects of the T bond yield curve are not yet flashing inflation warnings.
Treasury yields of all maturities are rising vs. the artificially suppressed ZIRP on the Fed Funds. This is by definition inflationary policy making. But in the example above, the 30 year yield has not risen vs. the 2 year yield. The implication being that inflationary concerns are well contained.
If long-term yields begin to out perform short-term yields, the resulting rise in the yield curve would indicate rising inflationary tensions along with systemic risk. The yellow highlighted area shows a 2 week pop in the ratio. There is as yet no trend change, however. Stay tuned. Gold should eventually follow the curve.
Early eLetter subscribers will remember the series of bear flags we warned about on HUI. The weekly chart above asks the question ‘is this another?’
Given the extremely negative gold bug sentiment backdrop and extremely positive Commitments of Traders data, any bottom attempt could be the bottom. Especially since the ‘low 200’s’ has been a downside target we have had on radar since the correction became ‘abnormal’ last year when HUI lost 460, which was then an important technical support level. The current bottom attempt is coming from a long term trend line from the beginning of the bull in 2000.
So it is a valid bottoming area and thus we give it a chance to prove itself. But thus far HUI is in week #4 of flag making and must make a strong move to break this flag to the upside soon or else the opposite will be likely. A bear market does not just end because we want it to end. It sets the terms and it eats hope alive. Risk management has been a life saver since last November and there is no reason to abandon it now.
Quite simply, the next rally or bull market in precious metals will likely be led by silver. The chart above shows a compellingly positive risk vs. reward in silver compared to 2011’s blow off, which came as the entire commodity complex flamed out with that particular inflationary hysteria (remember Bill Gross’ storied short position in the long bond?).
But the big picture support zone is rather thick. If silver has not already bottomed, a final phase of bearishness could bring much angst for people going all in now.
I am a believer in equal and opposite conditions where asset markets are concerned. The current over sold condition in silver is not yet quite as painful as the over bought euphoria was in 2011 when viewing the RSI in the lower panel. This is not to say silver has not already bottomed. But it is to say be prepared for anything.
Quite simply the broad CCI commodity index is at critical support and must bounce at the 500 area or else a continued deflationary phase will be indicated.
Bottom Line
Bringing today’s letter back to its open, the ‘taper to carry’ scenario represents what I believe is the next phase of the inflation attempt with the banks benefiting from a profit motive to get the ZIRP funds out to Main Street (borrow nearly for free and lend at a mark up). But thus far the deflationary pull has overwhelmed inflationary inputs with only the US stock market benefiting from the resulting ‘just right’ Goldilocks scenario.
While I believe trends are creeping toward a new phase where inflationary dynamics gain strength, there is little indication that it is gaining strength as of now.
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