We covered HUI’s status in yesterday afternoon’s update. The sector usually ends corrections (it has been in one long, corrective consolidation since 2016) with a shakeout, and these can be violent affairs. Our theme since mid-December has been that a rally in the sector as part of the ‘inflation trade’ (referred to as ‘IT’ below) would not be healthy and so, it has not been.
Countless times we’ve noted that the gold sector needs to be counter-cyclical in order to be something worthy of much attention. As an ‘IT’ also ran, it will suffer the running of the gold bugs eventually, as it always does. A flush of those who believe the fantastical stories about India/China demand, US inflation and rising prices as a catalyst to finally launch gold and the miners to the moon. We should buy the sector for real when deflation and/or economic contraction are concerns, not inflation. When the miners are getting wood shedded as their fundamentals improve (gold vs. oil, metals/materials, stock markets, etc.).
In short, asset market liquidations come first and the inflationary responses come after. As in 2001, 2008 and 2016, the gold sector has led these liquidations and inflationary follow-ons.
The anti-USD ‘IT’ appears to be getting rocked now as Uncle Buck bounces. Star performers of the ‘IT’ have been EMs and Asia, certain commodities like REE, Lithium, Palladium, Oil and Base Metals. And of course, US stock sectors that would receive the fiscal ‘reflation’ bid, like Materials and as a result of rising long-term yields (also part of the inflation trade), Banks/Financials.
Long-term Yields & Stocks
2 days ago Fed head Jerome Powell jawboned interest rates and yields rammed upwards. I was not impressed. Yields have come to our targets of 2.9% 10yr and 3.3% 30yr (+/-) and the noise has to be tuned out. Yesterday yields calmed down and bonds lifted, and in pre-market at least, that appears to be going on again today.
Despite the stock market’s recent troubles as yields spiked to target, it too has generally been a primary participant in the ‘IT’. We have shown charts of SPX and USD inversely correlated for much of the Trump presidency. If stocks continue under pressure I would not be surprised to see him and/or his little financial hand puppet Mnuchin start jawboning the dollar.
So that brings up another point; don’t discount the volatility that would be introduced when politicians and policy makers start opening their mouths in service to agenda.
But the main point here is that just as the bullish stuff has gone on against a declining USD/rising interest rate backdrop, the bearish stuff would likely benefit from the opposite, even if they are just counter-trend moves, which they would be at this point.
Shorting the market sounds easier than it is. You’ve seen me make some good trades in the last decline and fumble and bumble trying to short this market bounce. Timing is everything and it is the “screw everybody” market with its daily volatility.
But if this morning follows through yesterday’s reversal we just may have the makings of a 2nd leg down scenario that had been expected and heretofore refuted by the bouncing market. Some think it would test the low with a higher low. I happen to think there is a good shot SPX would make a new low to really put a scare into casino patrons (gap around 2460). Regardless, it dropped through the 50 day moving average yesterday and that is a well and good start to a bearish situation.
Now the market needs to play ball. If it holds to its frequent M.O. it would now whipsaw the bears and rise. But if it does not, the technical situation will continue to erode and we just might get that leg down.
Right now I am playing it by being balanced between what I’d like to be short and what I am long. If the market continues to weaken I’ll lean further to the bear side. But if all of this happens against declining yields (rising bonds) my main focus would be on the high cash levels that are paying interest (which should be +.25% on March 21st as CME futures players have an 83% chance of a March hike) and bonds are a good portfolio balance.
If more inflation comes later, which I think very possible, we could see a secular change in the interest rate backdrop and a real bond bear market. But that is not what we have been managing thus far. We have been managing an ‘IT’ to the long-term yield limiters of 2.9% and 3.3% and then… hold and await new plans on the macro. This stuff moves in slow motion and so we can take it in chunks, in phases.