Inflation/Deflation
Any strategy aside from stoically sitting with current positions and macro view (whatever an individual’s stance maybe) will depend on the inflation/deflation dynamic. More to the point, inflation expectations (IE) or lack of same. Earlier this week IE popped upward looking like the reflation trades were kicking in and today was day 3 in a pullback of IE.
IE have been rising since the March crash and deflation scare. As with many markets that took a harsh pullback today, so too did IE. But only back to trend after the earlier upward burst. Speaking of trend, USD bounced and so did the Gold/Silver ratio. If those two break their still-intact down trends there would be something to worry about with respect to failing IE and hence, the reflation trades.
So where does this leave our analysis? Not much different than it was before today and before this week. But a move in the deflationary direction would have to start somewhere so today could theoretically be a kick off. But technically, it is not that. Not yet.
US Stock Market
I did exactly as I’ve been almost wishing to do and finally pulled in my extended stock market positioning. I’ve been silently wishing for an end to the unabated – and foolish – over bullishness that has been in play. But again, SPX is merely pulling back to test the very short-term EMA 20 at this time. There is a gap at breakout support, which it will probably try to fill. I generally do not short markets or stocks that are in unbroken uptrends. So I took profits on VIXY today and moved on with the Euro my only short position.
NDX filled a gap and tapped its EMA 20 as well.
Frankly, depending on the inflation/deflation question and especially on the still-intact technicals of these markets, I am open to re-positioning, even upgrading if this turns out to have been a twitch to shake out the momentum players, of which there were plenty working these markets. As noted in the Trade Log, I have my eyes on some of my former holdings like DOCU, DDOG, ZS, etc.
But with profits in hand I also have patience. Newer subscribers, please note that we will not try to make ‘coin’ when it is not appropriate (and I am not a foremost bear trader). 2020 has provided a big opportunity that has already played out. It may or may not be ongoing. But my default view to the market now is ‘prove it, I’m happy with cash’.
Precious Metals
As noted in the previous update, today’s market pummeling came at the exact right time for the favorable view of the gold sector to remain not only intact, but potentially at a platform from which it could out perform again. What I consider the most important macro consideration for the sector, the Gold/SPX (or gold/stock markets in general) ratio held its ground on the pullback to the 200 day average. Again, ref. the update linked above.
The miners hung tough today despite the pressure elsewhere. HUI is still in a new consolidation that is morphing from the former Diamond to a Symmetrical Triangle which, if it plays out as the continuation pattern it is supposed to be, would precede new highs.
The caveat I see here is that as I recall Huey hung tough at the beginning of the Corona-crash in stocks but then not only got sucked down with it but crashed also; and it crashed hard. So the miners may well be interested in the question of whether a still-intact stock market is going to remain that way.
Stock market weakness from here on may well be favorable for gold stocks. A stock market crash, with the margin man calling on a whole new crop of casino patrons, might not be. A crashing of inflation expectations would likely bring on the running of the inflation bugs. But speaking of intact, that is still an intact and nicely up trending chart just above. Even better, during this corrective consolidation the SMA 50 has risen to near the current price level.
And the HUI/Gold ratio (HGR) has remained nice and orderly as well. Hence, I don’t want to be negative on this sector and to the contrary, remain positive on it. What changes that? Well, a breakdown in the HGR would not be helpful and would raise caution as it did pre-crash.
Bottom Line
- Status has not changed for the stock market, but is on watch for change due to unsavory over-bullish sentiment profiles and out of control momentum (thus far it was just that most recent momo that was reversed today).
- The gold sector appears to have done good corrective work and as of today’s close maintains its fully intact status. Gold/SPX ratio held its higher low and that is important and must continue. The same goes for the nicely up trending HUI/Gold ratio.
- But as noted at the open, the inflation/deflation question is still up for debate and we don’t want to be caught guessing. I do believe that a whopper of an inflation is being summoned by the Fed, but the question is whether we’re going to get a classic fall interruption first (there is this little detail known as the most divisive US election in the history of our republic, after all). Deflation scares present the big opportunities, but first you’ve got to stay out of the way of the worst of their damage. As yet, it is not indicated. But today was a lurch in that direction.
