New Year, New War; But it’s Still the Economy (stupid)

Happy New Year

2020 is kicking into gear with the fading noise about the trade war morphing into a rising din about a potential shooting war, complete with World War 3 headlines. This will be worked through as is usually the case with inflammatory geopolitical events, and then the market’s dynamics that matter will kick in again.

On New Year’s Eve we noted that the gold “community” was getting a little peppy in its optimistic headline making, with certain bearish bugs reversing course to bullish in line with the rising price of the metal and miners and a fade in the US dollar. As the Q4 reflation/inflation trade bounced on, a growing contingent of inflationist gold bugs positioning in gold and the miners became a concern. To them you buy copper, you buy oil, you buy hogs, you buy land and you buy gold against the dreaded inflation. It all goes up together when the inflation bugs are in play.

Friday started out doing little to dissuade the turning of the bugs to bull mode (right before before a negative reversal in the miners), although in the interest of fairness, while the geopolitical situation should be tuned out by right minded bugs the economic situation should continue to be tuned in.

The ISM manufacturing report for December was another stinker, and that is a positive for the counter-cyclical gold sector just as it should be * a negative for cyclical and/or cost-push inflation dependent markets like broad stocks and commodities. In particular, New Orders declined again as did Employment. Backlogs have been and remain bad. Those are the important ones, along with Inventories, which crept up. But what’s up with Customer Inventories? They are too low and need to be replenished with new orders or else there is going to be a problem.

Finally, check out the Prices component. That is stagflationary signaling, considering the weakness throughout the rest of the report.

ism

* “Should be” because the Fed and global Central Banks stand ready, as ever, to pump the limp economic system as long as the bond market allows (and wouldn’t you know, the herds rushed into Treasuries right on cue amid the war headlines).

As 2020 Opens With a Bang and the Dust Settles

Well, this article’s scope is much narrower than would be needed to give a real analysis of the global macro markets (we’ll continue that discussion in NFTRH this weekend). But let’s just take a look at two opposing assets here; the S&P 500 and Gold.

We noted this afternoon that despite fear-stoked headlines the VIX was still in lock down and the Silver/Gold ratio (SGR) was still intact. These are still the cases for each of these indicators, but keep an eye on the SGR because if it goes negative again it could be a negative price indicator in the short-term for the precious metals and eventually, for the broad markets.

S&P 500

Backing out the ISM and indicators like the VIX and SGR, let’s take a look at the damage inflicted today on the SPX. Whoa! Look at that gappy expression of bullish greed all the way from when we were instructed to be bullish at the Bull Turnstile back in November.

After Friday’s fear fest the SPX dropped all the way down [sarcasm] to fill the first gap (of many left open). This could represent one of those sentiment micro-twitches that worked so well to reset emotions on the very short-term with every trade war utterance on Twitter by the president in 2019. The difference now is that he is throwing bombs instead of threats and taxes. Still, all the SPX did was fill a euphoric little gap up from Thursday. Is it a micro-twitch prior to new highs or the start of something?

It’s an overbought market, price-wise and it’s over loved, sentiment-wise. It remains as we’ve noted it to be; at a high risk vs. reward and bullish in all of its trends. But don’t count on those gaps remaining unfilled in 2020.

spx

Gold and Gold Miners

I’d been expecting a nice, orderly corrective consolidation to continue within its bull flag to the nice, neat and sensible 1420 area convergence of the rising 200 day moving average and lateral support. Well, gold had other ideas and we went with them as it nudged its way out of the wedge and above the SMA 50, after which it was gone… on its way to Friday’s test of the highs.

As noted above, gold had been doing this along with the various inflation/reflation trades in commodities, resources and the global macro during Q4 2019. On Friday it did its thing amid the war drums. But also as noted above, it did it with a proper gold sector fundamental indication, which was the further weakening of the US manufacturing sector.

Gold is overbought, in a worse risk vs. reward situation now (not even to mention the over-belabored CoT) and as with the Good Ship Lollipop directly above, also bullish. The technical matter of it is that this move is the type that would normally seek a new high, regardless of what we may think we know about sentiment.

gold

Finally, the miners (as represented by the HUI) took a shot upward to a new cycle high after holding the support we had laid out as key in an NFTRH update at the time. That was the short-term EMA 20 (grey dotted line) with an allowance to the SMA 50. If it does not hold initial support at 235, there is that fat support zone, including the SMA 50, in waiting. The moving averages are trending up and so Huey too, like the charts above, is in an uptrend.

hui

Bottom Line

Stocks are as they have been; bullish by trend and at risk by sentiment. What’s more, the real (i.e. manufacturing) economy is becoming something of a headwind. The stock market will lose momentum and fail into a correction if not a bear market when it does so, and not a moment earlier. It could have begun on Friday or that could be another bullish micro twitch. We’ll have to just keep dancing (and managing risk) until the music stops.

As for gold and especially the miners levered to it, I do not like the influx of inflationist gold bugs on the scene today. They’ve been drawn in by the Q4 2019 bounce in the global resource and commodity play. I also do not like the big boost today in gold on geopolitics along with the conspicuous in-day reversal in the miners.

What I do like is the fading ISM and other signs that the inflation could fail to drive the economy in 2020. That would be the counter-cycle and the best fundamental backdrop for gold mining as gold rises relative to stocks, commodities and cyclical assets of all kinds.

It’s all logical and we’ll be managing the process each week in NFTRH, just as we did very successfully in 2019. The markets – especially noisy ones – do not move in linear fashion and they sure don’t lay out linear signals for participants to follow. 2020 promises to follow an irregular path that will be made manageable by doing the work each week to interpret and adjust.

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