NFTRH; Game Plan Summary… If/Then

Ref. last night’s post on the S&P 500. The longer the market remains weak, the further it strays from the prospect of a 2nd tap of the upper bound of the reverse symmetrical triangle.

I just want to make sure we are clear on the preferred market view, should the market continue to weaken here (it’s down in pre-market). So I thought I’d put the work done to this point in summary form.

If the US stock market gives way and loses key support generally corresponding with the SPX 50 day moving average then

  • The next key test would be the SMA 200, currently trending up at 2835.97. That generally coincides with a cluster of lows from August. If it takes those out the bearish potential increases markedly. Then the June 3rd low of 2728.81 would be the only thing standing in the way of a bearish scenario that would target a test of the December 2018 low (2346.58) at around 2400 +/-.
  • Against this backdrop we’d expect a deflationary mini-hysteria, which may or may not morph inflationary or at least see rising long-term yields somewhere along the way. Yields can rise due to revulsion toward government debt as well. Either way, and even if yields do not rise the yield curve would likely make another attempt at steepening as the herds rush to the relative liquidity of short-term bonds.
  • Commodities would be expected to remain weak until such time as a cyclical inflationary backdrop may be indicated. Avoiding them has been the right play for a year now. No reason to change that unless the proper signals come in.
  • I would expect most global markets to feel the pressure from a US selloff. There could be a few exceptions and positive divergences, but stocks are stocks and the market is global.
  • I would become very tempted to abandon my view of a short-term correction still in progress for gold and gold stocks because this would be the engagement of another phase of the proper fundamentals. Again, we are talking “IF” the US stock market gives way. Gold would be the better candidate to shake off the correction and at least stabilize as it tends to be a receiver of a liquidity bid (usually after USD and Treasury bonds) during times of such stress.
  • Gold stocks could be another story however, because they are stocks; paper (or electronic) certificates of ownership. They could continue to get sold down to the extent that broad market players own gold stocks and are puking for liquidity; seeking to be made whole.
  • But a backdrop of draining market liquidity, declining stocks and associated public confidence would be the best environment in which to buy quality gold (and likely, silver) stocks. In Q4 2008 I bought the crash at logical support (HUI 250) and then found myself buying again at white knuckles support (HUI 150), which was finally and mercifully the bottom.
  • If the plan laid out above is on target I don’t expect a gold sector crash because gold stocks were over played and over valued into that 2008 event. This cycle they were under played and under valued. I’d continue to see this as a routine, but potentially tough correction. I’d love to see HUI ding the 170 to 180 range as per Monday’s update. But given a macro fundamental backdrop that would be engaging bullish again, I’d prepare to be nimble and open minded in this view. My bias is bullish, after all.

But first, the US stock market needs to crack. It’s only one pre-market session below the 1st SPX support level. One news item or jerk of the Algos in a certain direction could undo that in a heartbeat. So let’s take it step by step with a logical game plan in hand in case the macro turns.