alice in wonderland

NFTRH Interim Report

Opening Notes

As advised on Sunday this week’s report will be abbreviated due to travel plans and we’ll be back to our regular programming next week with NFTRH 566.

I continue to keep carts behind horses with respect to the US stock market, which with some negative sector divergences and weak internals remains in its long-term uptrend. Also of note, the SEMI→Tech→S&P 500 leadership chain remains intact.

I want to be bearish because slowly but surely some economic data are starting to point that way. But then again this is all about the Fed and its willingness to ultimately jump in with both feet to join its global fellows in an orchestrated flood of liquidity, isn’t it? The threat of policy action or the president on Twitter saying something to move markets is more than I for one am willing to stomach by leaning too far one way or the other. So I continue to balance, trim, add and sculpt my portfolios little by little in line with what I think is happening out there.

So what the heck is happening? Inflation expectations have tanked, as we’ve taken pains to note the macro environment has come full circle back to an alignment where the Vampire can enter at any time. The Fed was most decidedly NOT going to be a benefactor of markets when long-term interest rates were breaking out last year. But as rates got under control and especially now with yields and inflation measures tanking, they will be… or they will try to be.

Economist Lays Out the Next Step to Wonderland for the Fed

Enter, the Vampire

My question is whether or not there will be an intervening hit to the US stock market, likely amid continued decelerating economic data? In other words, it usually works so that a combination of tanking inflation (and interest rates) in combination with distressed asset markets finally jerks the Fed into action as it promotes what it has been promoting most obviously since 2000… inflation.

The table is set, but the damn US stock market continues to cling to its bullish trends. My view leans macro bullish well out ahead, and the bullishness would be driven by the inflation the Fed is likely to try to promote. The things that benefit most from inflation would massively out perform (talking to you, commodities). But thus far, commodities remain ‘hands off’, stocks have not given up the ghost and the Fed plays it cool.

Something is coming. The perfect setup would be a typical Q4 macro puke fest, to be followed by a bald faced, all-in policy move by the Fed. This daily market whipsaw up and down with political rancor entering the mix more intensely, a big mouth president who just will not get off the Twitter crack, slowly easing economic data amid a summer season wit da boyz still in da Hamptins sippin’ dem Mahgaritas won’t do it.

In short, I want to be bullish on an inflation trade but first am waiting for a break and a climax, which is what the Fed may also be waiting on. A final component of stocks finally giving way. Short of that, the stock market’s trends are up, it is above important support, it has benefited from recent short-term sentiment climaxes (if not price drop climaxes) and the grind wears on.

So I am carrying plans that will be revised if needed and not acted upon until the signals come through.

The favored and ultimately most profitable would probably be for stocks to finally give way, joining inflation expectations, the Fed to finally unveil itself as an agent of inflation in order to keep the debt racket going and people like us, with enough cash to take advantage, doing just that. The less favored plan would be for the whole mess to keep on grinding, on trend with a half-assed Fed doing a couple more cuts but remaining coy.

An utter panic would favor the precious metals and their miners and would before long (in the theory of my viewpoint at least) fan out to commodities, resources and resource centers. Meanwhile, the PMs are on a consolidation (that may have broken on Wednesday but could still resolve into a larger pullback) and in general I want to add, not subtract from holdings now, strategically. The main short-term concerns here are the still-bullish stock market, the coy Fed and of course the extended CoT. You can check one of the multiple sources listed here at the links page after 3:30 (US ET) for the CoT data as of Tuesday (I’ll be on a train, likely unplugged from the market).

US Stock Market

SPX is below its SMA 50 and above its SMA 200. Generally, let’s use those blunt instruments as the gateways to either bullish resumption (which could launch at test of the highs or even slight new highs while keeping SPX within the confines of the would-be bearish Reverse Symmetrical Triangle ‘Megaphone’ at point 5 on the weekly chart we’ve reviewed each week) or a bearish resolution (which doesn’t have to kill the major bull market, but could provide some trade-able downside not to mention a lever for the Fed to pull if SPX takes out the June 3rd low of 2728.81.

Economy & Market Internals

There is a lot of talk now about the weakness in manufacturing (ISM prices, new orders, backlogs and employment are decelerating), the significant downward employment revision and of course the varied effects of the trade war. With a fairly humorous (to me, but then again I find humor in some pretty weird places) media obsession on an inversion of the yield curve and the toxic political backdrop it’s just not a very positive backdrop out there.

To that we add fading internals like the aforementioned inflation expectations (the thing runs on inflation, after all), wobbling to bearish leadership ratios like SPX/Gold, Base Metals/Gold, Discretionary/Staples, Junk/Treasury bonds, etc.

On the plus side, Growth stocks continue to wildly out perform value stocks and the SPX Advance/Decline line is still positively diverging the SPX price. These last two items would play well with the scenario mentioned above where the damn market tests or makes a new high before failure.

Global Stock Markets

There is some bullish out there. For instance, Brazil. For another instance, Russia, which has pulled back but remains on its 2019 uptrend. China, while technically bearish feels to me like a contrarian play to be if/as the economy forces Trump to back off and play politics for a while. EM and FM would be of interest if/when a coming inflation trade engages.

Going the other way, India is losing its uptrend and Australia has held its potential breakdown. Europe is bouncing but highly suspect. Japan is even worse. Canada’s TSX still looks vulnerable and speaking of Canada, the TSX-V (CDNX) is bouncing again. That’s the index we want to keep an eye on w/ respect to a future inflation trade. It’s down trending but bouncing. I want to keep it close to the vest as it could marry other signals and let us know when to go in on the commodity plays. As it is, a lot of small hole drillers (AKA gold and silver explorers) are already perked up.

Commodities

Copper has weakened again within its already bearish technical situation. Would it not be grand if copper finally were to give way from its current price of 2.56, lose obvious support and spike down to 2.20 while at the same time the stock market puts the scare into the public? That’s the stuff that a weak and panicked Fed would be made of.

It’s also why we own gold and the precious metals first. Whether in 2001, 2008 or in a smaller microcosm 2016, gold has bottomed and turned up leading the miners and silver, which in turn lead the cyclical stuff into new inflationary phases.

Take a look out there at the bond hysteria now in play. Yields are crashing! Deflation is coming! We await the Vampire (and so does the inflation trade).

Precious Metals

As already noted, I’ve done all the selling I’d care to so anything I change now is either to take a little more well earned profit and/or bring on other positions. In other words, it’s portfolio tweaking.

As also noted, the pullback in the miners has already qualified as small bull market pullback and on Wednesday the miners made a move to break the latest flag and have eased the last two days. It remains to be seen whether there will be more downside, but the Wednesday spike may have signaled the end of the pullback. Regardless, the sector is bullish and still on plan fundamentally (with the post-FOMC yield curve flattening the main holdout).

Some reputable analysts think that a big market liquidation (the final word on the current deflation scare?) would drive down the miners (HUI 180 would appear an obvious aggressive buy area) but I am not at all certain they would go down with the market as in Q4 2008 because back then a significant over valuation was rightly addressed in the miners and this year’s rally began from a significant under valuation.

Regardless, our longer range target continues to be HUI 350-375. The main short-term issue continues to be gold’s Commitments of Traders, which have been quite extended (with all due caveat that bull market rules are different than bear market rules and in a bull market the CoT is often extended… it’s just the way it is).

Final Thoughts

I am going to clip it here lest I write a full report when you had thought I might give you a break this week. :-)

  • Regardless of the short-term scenario in the stock market (rise to a high risk test of the highs at point 5 or a failure here) a cash position sufficient to provide risk management and thus comfort is recommended. The opportunities to deploy that cash will come but it could well come after some distress, which is in turn the lever the Fed needs to finally dive into the global punch bowl.
  • On the other side, when the all-clear is sounded we’ll think about Industrial Metals, Energy, Agriculture and resources of all kinds as we might envision a year from now a global panic into hard assets as the next inflation problem builds. But today? It’s still caution time.
  • And who would lead us to that new, inflationary world? Why gold, miners and when it takes over leadership, especially silver. There will come a time (if we are correct in the inflationary future view) to de-emphasize gold miners in favor of more cyclical items but that time still appears well out on the horizon.

See you next week with updates as needed and NFTRH 566!