NFTRH 354, Online Edition

A commitment has come up this weekend that will only allow me the time to review key points in NFTRH 354.  What a great opportunity to put more detail than usual in an update [edit: this has turned out to be NFTRH 354, with a PDF update to be mailed on Sunday].

Stock Market

We have been noting for some time now that stock market participation is fading, along with rolling momentum and even suspect price charts by daily, weekly and monthly time frames.  But as this blog post by Andrew Thrasher (thanks for the link Joe!) points out, the market is still in an uptrend (as we have also been noting) but risk is elevated (as we have also been noting).

The Greatest Risk of a Market Peak Since 2007

I think he does an excellent job of illustrating the technical situation, which is generally a market that is going nowhere.  As you know, I greatly respect risk vs. reward analysis, not people who try to predict what will happen.  Risk vs. reward is key, and it is not good right now.  Sometimes we just have to deal with probabilities and cut down on our own market participation until directions are chosen.  That is what I am continuing to do.

The elements are in place for a severe correction but as yet, sideways it is.  In not breaking support or establishing a downtrend on the weekly views, the market is also technically still capable of resolving bullish, which would be the blow off scenario we have also considered.  There are targets up there after all.  When the market either gets above certain parameters or drops below others, we can refine the view of what comes next.  Right now, ‘at risk’ remains the view.

Personally, I am watching the Semiconductor Equipment sector because that is one area where we have positive business data (book-to-bill) through June.  The SOX continues to threaten a breakdown vs. SPX.  Since it was the index that began leadership of the most recent up phase in the markets in late 2012, it is the index I am watching now.

I am allowing wiggle room for the breakdown as a sort of reaction to the 3 breaks up that failed.  Any lower and the market runs out of tolerance by this leadership measure, in my opinion.

sox.spx

As for nominal SOX, I am waiting for it to break down before raising the caution level to RED.  Short of this breakdown its trend is bullish (and I am getting beaten to a pulp on Semi stock SIMO).

sox

Similarly, Small Cap leadership has been fading.  RUT-SPX has not been nearly as consistent post-2012 as SOX-SPX, but if this breakdown from the secondary channel holds up the signal is flat out bearish for another market leadership indicator.

rut.spx

As for nominal RUT, it’s similar to the SOX in that it has refused to break support and is in a big picture up trend.

rut

Bank index vs. SPX is getting in line with yields just as it was supposed to.  This leadership should only go as far as rising long-term interest rates do.

bkx.spx

As with the other charts above, nominal BKX is still above support and so we have to keep the 85 target on it.

bkx

US Stock Market Bottom Line

In short, I am waiting for breakdowns in price before getting too worked up about a market that seems like it is supposed to go down.  As Andrew Thrasher noted, as long as ‘price’ is in an uptrend well, it is in an uptrend.  Certain key indexes are now at points where they need to hold support and/or turn up or else the negative signals are going to intensify.  Risk vs. Reward, given the degrading indications to current prices, is negative.

Interest Rates

With respect to the Banks,  here is the daily view of 30 and 10 year yields.  They look suspect, but remain in up trends as of now (higher highs and higher lows).

tyx.tnx

Gold Sector

Here we will throw in macro fundamentals and indicators as well, which would also be relevant to broad markets for reasons generally opposite to the gold sector.

Indeed, why even go into detail on gold, silver and the gold stocks since we have a clear target on HUI (100 +/-) and what has been ‘bounce’ potential (from a markedly improved contrarian sentiment and CoT backdrop) in the sector?  Thus far, it has not even managed to bounce although I don’t think it is my imagination that on FOMC week gold is always trashed.  It allows them to ride off into the sunset after another job (of doing nothing) well done.

But as we have noted all too often, the macro fundamentals that we (as opposed to easy analysis you see out there) care about are not in line.  Sure, CoT is getting compelling, gold has made progress vs. commodities and in particular oil.  But I will remind you again that the following charts are taking the Fed seriously and are not in line for gold.

Gold-SPX and Gold-STOXX 50 remain in down trends.  The implication continues to be that global policy making is in control and confidence remains intact that policy will stand behind the ‘right’ assets for mainstream investors.

gold.spx

gold.stox

10yr/2yr yield spread per our more conservative way of calculating (as opposed to 10-2, which is used by Stockcharts.com and others) is losing its bottom or bounce potential.

10.2

10yr/1yr is taking another leg down.

10.1

Here is a view of the 1’s along with the 3 month T Bill yield.  This says that confidence in the Fed is right in line.  The Fed is going to do what it says it is going to do and raise the Funds rate say these two…

ust1y.irx

None of the above are bullish for gold.  Until that changes we do not have the complete fundamental picture or opportunity that we had in Q4 2008 when not only were gold and especially the miners tanking, but gold was sky rocketing vs. commodities, stock markets, some currencies and turning up vs. T bonds.  Also you will recall that amidst that deflationary event, USD was very strong.

This is where we need to doubly make sure we are tuning out any inflationist holdouts still touting the death of the dollar.  A strong or firm US dollar goes with our preferred investment plan, not against it.  But only when deflationary forces gather to the degree that confidence in policy makers starts to fall apart.

So while we have allowed for gold to bounce to 1140 and silver to 15.50 and HUI to 130, 140 or a bit higher, we have also noted that silver could eventually target well down into the 13’s, gold below 1000 and HUI 100 +/- (with respect for the minus side of that little wiggle room symbol).

Gold Sector Bottom Line

It is opposite to the stock market as noted above.  Risk vs. Reward is positive from a CoT, sentiment and over sold price standpoint.  But macro fundamentals are not yet in line and so, this is not Q4 2008, which was the last great table pounding opportunity.  When I see this begin to change you will be the first to know.  Otherwise, we will just report reality and not any preconceived agenda.

Global View

Canada’s TSX is in daily and weekly down trends.  TSX-V is utterly destroyed.  Canada dollar had a serious breakdown a couple weeks ago and so the average Canadian sees a bull market denominated in the local currency.

Europe is doing the same and we can keep an eye on the currency hedged HEDJ.  I almost bought it yesterday as the Euro looks weak and bearish on a daily chart.  But a weekly is showing a bounce that could still be in progress.

The rest of the suspects continue to be a mostly bearish bag.  India (BSE) is still okay by daily charts but more suspect on a weekly.  EM’s and China are bearish.  Check out this weekly chart of EEM.  It is ugly at best, and forming a bearish pattern as of now.

eem

Indeed, what is going on in much of the rest of the world can be considered another negative divergence to the US market, along with its own fading momentum and participation.  But also note that divergences are just divergences until/unless something comes of them.

Global Stocks Bottom Line

A mixed bag weighted toward the bearish side.  Yet globally, per the Canada example, currency devaluation is working to try to keep local players in bull markets.  Australia is another example, as is Japan.  London’s FTSE by the way, stands out as an exception as the British Pound goes sideways and the stock market rolls over.

 Commodities

People keep saying commodities are going to bounce, this is a generational opportunity, inflation is going to come to the surface, etc.  Okay, but first CRB has got to stop going down.

In 2008/2009 a bottoming pattern formed and indeed in early 2009 we got bullish oil, copper and the rest of the bunch.  This was in tune with the massive inflation promoted by US policy makers and it followed the gold sector’s bottom.  Note that below, we have the potential to make another pattern (with the left side shoulder formed and the head currently in the making) at 2009’s support.

crb

Let’s not read anything more into it than ‘potential’ right now.  The global deflationary pull has dropped CRB to its depths and if it grinds out a bottoming pattern it could signal a coming inflationary episode.  But this pattern – if it is one – began to form at the beginning of 2015 and may not yet be half way complete.  The implication is that anything technically actionable will probably not come about until 2016.

I would also expect gold to the first ‘commodity’ mover in such an inflationary phase, as per Q4 2008.

More Indicators

Gold-CRB looks fairly bullish with the caveat being that the spike up to 6.04 did not make a higher high.  This would eventually be a bullish underpinning for the gold sector and a bearish one for the global economy.

gold.crb

Palladium-Gold continues on a bearish cycle, with negative implications for the global economy.  This indicator went positive in January 2013 in lockstep with the Semiconductor Equipment sector as an early indicator on the positive economic cycle that has taken place in the US, at least.

pall.gold

Here is another view of PALL-Gold.  Let’s open our minds for just a moment and interpret one of its messages, which is that a cyclical metal vs. a counter cyclical metal is now in a long-term uptrend, post 2008.  It is also on a leg down from a higher high.

pall.gold

However, let’s dial it way out for even more perspective.  PALL-Gold only became cyclical in 1997 as its ratio to gold took a bubble blow off along with the US stock market in 2000.  Frankly, I am not sure what to make of that and welcome your input.  Was there new regulation back then about auto emissions and the use of PGM’s or other discrete applications that may have fueled some bubble hype?

pall.gold

While we are at it, let’s add Platinum-Gold just because.  This PGM is just brutal vs. gold on the big picture and again I welcome input from you metals experts out there on what implications if any, can be drawn from this.

plat.gold

Final Thoughts

The US dollar has gotten the ‘all in line with the Fed’ bid this week (ref. the T-Bill, 1 year yield chart above).   I am not convinced its short-term correction is over, but in having made a higher high to May, it continues to follow the script of a new uptrend that began with the higher low in June.  Here is the chart from a public post yesterday.

usd

Our best view of the gold sector would include a strong USD as noted above and in line with 2008.  But this is only the case if a strong USD is gaining the ‘capital flight’ and ‘rush to liquidity’ bids.  In other words, a Risk ‘OFF‘ bid.

We have noted above that Risk vs. Reward is not good but as yet Risk, for the average market participant, is still ‘ON‘.

Meanwhile, speaking personally I will trade anything and that includes gold stocks.  Having dropped my hedging, the last week has shown some slight losses and I am not going to tolerate this indefinitely.  Also, cash remains the thing above all else in a time of question (trend vs. risk/reward?) for most markets.

Others may be buying long-term gold positions for a coming rally or bull market.  But please do so with the understanding that the fundamentals have not come in line as they did at the last great opportunity.  I am going to repeat that as long as it holds true.

Very generally here is what I see for two opposing markets:

  1. US stocks are bullish, in technical up trends (weekly and monthly views) and are at high risk.
  2. The general gold sector is bearish, in a technical down trend on all time frames and is at improving Risk vs. Reward.  The reason the RvR is not near compelling is due to the hold out macro funda’s.  When those come in line, a table gets pounded.  But not until.

Finally, I enjoyed writing what started as an extended update, but turned out to be a compact NFTRH edition (we’ll call it NFTRH 354 with an addendum to come via PDF as usual on Sunday) in online format this week.  I welcome your thoughts or ideas about whether or not anything should change going forward.  Frankly, it is much easier for me to write using WordPress than it is using Word, which is then converted to PDF.