NFTRH 667 (online edition)

Let’s start with pre-market (report start time: 6:30 US Eastern Time).

Also note that this report is begun well before the 8:30 release of the July jobs report. I’ll wait until after the release to finish the post, as what appears pre-jobs could well be put in a blender of machines and algos gone wild when the figures are out. With what the media are calling a wild card jobs report (analyst employment estimates are all over the map) coming, the contradictions noted in the first segment of this post make sense.

Yields and the Inflation/Reflation Trades vs. the 2 Horsemen (USD & Gold/Silver Ratio)

Treasury note futures are down this morning, which means yields are up and the (monthly) 30yr yield Continuum retains its potential to put in a reasonably symmetrical right side shoulder. Which by extension means that by this indicator at least, the inflation trades still have a chance to resume near-term. Here is the yield as it closed yesterday.

Arguing against that is the combo of US dollar and the Gold/Silver ratio (GSR), each of which have been rising the last couple of days. USD (daily) held above the next support level at 91.50 and the up-turned SMA 50 and is now testing former support (now minor resistance) and the (blue dashed) neckline to the still theoretical inverted H&S.

The GSR held the SMA 200, which we noted should act as support if this second rider of liquidity destruction were to stay constructive for a run up after making and breaking out from a base.

Sticking with a metallic view of the macro markets, with yields up copper is logically positive as well but it is two contradictory things, technically; 1) at support and 2) still below the 50 day average and the broken channel. As a metallic side note, Palladium (neutral w/ a positive bias) is slightly positive, Platinum has broken down again (to my eye currently headed toward 900) and Nickel is trending up and bullish.

Bottom Line (after which I will add in post-jobs comments)

Logically, if jobs comes in burning hot a big time knee jerk back to a (cost-push) inflation view could conceivably slam into play (much like when the US government announced its roads & bridges bailout). If jobs come in unexpectedly low (maybe with a side order of Delta Variant jitters) then liquidity could continue to be sucked out of the markets.

Hence, keeping it really simple, let’s call it yields, copper and other inflation/reflation signalers vs. the USD and Gold/Silver ratio, which would signal market liquidity removal. With both sides of the argument constructive but also vulnerable, I’d have to say ‘jeez, tough market’. Maybe after 8:30 I’ll be able to be more definitive in this space right here (in fact, I’ll take a little break and wait until after Jobs before adding more material to the report) >>>

Post-Jobs

The number came in somewhat better than expected, USD has firmed (poking the neckline @ 8:56) and the Gold/Silver ratio is holding steady. Nominal gold and silver are getting dope slapped as would be expected. Don’t fight it if the precious metals completely flunk here. That would be the drive toward future opportunity. In the short-term, I’ll regret if I have to dump my non-core ‘bounce’ positions, but these are the markets and they don’t care if I am regretful or filled with joy.

The signalling appears to be inflationary but with a fear of the Fed raising rates. You know it occurs to me that the machines and algos that drive these markets are so damn literal in real time. No nuance about whether the Fed is likely out of options (raising rates would croak the inflation they’ve tried so hard to build, which barring a Goldilocks economy is the driver of the economy). It is normal for the precious metals to get croaked at such a time, as if the machines just swerved in line with that logic.

On the face of it, the signaling is joyful for the reflation trades, with the 30yr yield popping and the Jobs report likely stimulating cost-push inflationary urges. But the USD/GSR combo may beg to differ if it continues to hold up.

Taking the 30yr yield charts in a vacuum, we are still on the 60-70% lean toward its right side shoulder (monthly) and inflation. If inflation expectations (e.g. TIP/TLT, TIP/IEF, RINF) pop today that would be another signal. Think of the Continuum as having unfinished upside business. But also bear in mind that news-driven knee jerks are potential fake outs (ref. here the still firm USD and GSR).

As such I am in no hurry to increase positions in the reflationary patch until the jerk settles down.

Gold is getting the bugs screaming about manipulation. On cue. You can see critical support at the upper channel line. Let’s call it 1750 to 1760.

Silver is again testing the last ditch support we noted for it previously at around 24.75. Lose that, take out the March low and I think it’s on the 21.23 Express.

Discussion

So forget gold and especially silver for now. Gold is a store of value (cliche’ but IMO true) and it is a barometer of the cyclical assets in motion getting tossed to and fro across the macro. This morning the macro signal is positive with a warning below the surface in the Gold/Silver ratio’s resumed rally. Here’s a snapshot of its current status (9:18):

If inflation is the play why is the more inflation sensitive metal (silver) crapping out even more than the less inflation sensitive one?

As this point the signal is as it usually goes in early times (of potential change). The precious metals get croaked first and hardest (ref. Q4 2008, Q4 2015/Q1 2016, Q1 2020) before recovering hardest and best to lead other markets.

Problem here being that other markets are stable to bullish. So let’s see the macro fall apart before we talk of the precious metals leading a new bull phase. The PMs were bearish (w/ bounces) all through the first inflation phase of 2020-2021 and if the next phase is in play inflationist gold bugs might need to get hammered again while the reflating world happily sails on (as long as the inflation is perceived as the ‘good’ kind).

ES & NQ (futures)

Both are on their bullish uptrends. One wonders, however, if the fading ES volume means anything. SPX is not so apparent, but let’s also not there that down volume has been exceeding up volume since mid-July.

US stock markets: At high risk. No change there. Trends are bullish and there are some negative internal divergences going on. I’d continue to lean Semiconductor in the short-term (at some point the market is going to discount the bullish case because technicals are one thing, but valuation is another), Healthcare and other defensives (e.g. Utes, Staples, etc.) and if long-term yields do start a new rise, ‘value’ over growth (I’ve got some of the latter in my portfolio and will evaluate).

As for the bear case, it is out there. But there is a difference between intellectualizing (imagining) it and signaling it. Risk is high. That’s as bad as the story gets for now.

Global Stocks: If the reflation kicks back in EM (and resource-rich countries) and Asia may regain some momo. But again, why is the USD (w/ the GSR in its side car) strong? I’d let the jobs report and any associated inflation hysterics shake out a bit before firming opinions to strongly.

Precious Metals: Are and have been in downtrends. The thing lately was just a bounce to begin with. It may well have ended when the gold bugs cheered some poor economic data the other day and HUI and GDX halted at their 50 day averages and reversed.

The market is open and here is Huey at 9:38:

I suppose I will wait a bit before getting rid of any of the non-core garbage, but I’d like to resolve the portfolios and get them in balance for the weekend before I leave today. The above is an ongoing downtrend and thus far at least, a classic failure at the SMA 50. Speaking personally, I probably should not have given it this much of a leash.

Funny enough, in checking the portfolio the main culprit to a bad start is Biotech stock DRNI with a classic release of unacceptable trial data. Two things: 1) it was wise to eat the taxable gain and sell half of the wildly profitable position previously and 2) the rest is sold for a much diminished profit of 11%. #showbiz

Now to evaluate gold stock positions and frankly, everything else in the portfolio.

<back in a while>

Commodities: (10:15) CRB is weak but still above the 210 magic number. If the inflationary view is the play and it spurs the reflation trades, it’s not yet showing up on balance in the commodity space (hello USD & Gold/Silver ratio?).

Precious metals micromanagement (10:28)

Gold is right there. Right at the key level it must hold in order not to resume its bearish trend.

Silver has poked below support and as such is bearish with significant downside if this is not a head fake.

HUI on the other hand is testing and so far holding the last ditch support noted for it on the chart above.

US Market Sentiment

While sentiment indicators generally remain structurally over-bullish indicating market risk, the jumpy and jittery AAII continued to show a pullback in enthusiasm as of Aug. 4th. Periodic jitters by Ma & Pa (and others) have renewed the market rally since 2020. In a vacuum, AAII certainly are not standing in the way of continued bull action while other less micro-sensitive indicators continue flashing their ongoing warnings that frankly, usually go with extended bullish markets.

An ally to the AAII and the bulls short-term is the Smart/Dumb money indicator, which is also nowhere near a red alert at this time (smart is buying and dumb is fading).

Bottom Line

As I see it a little more than 3 hours post-Jobs the stance remains the same. Bullish but high risk stock market, 60-70% lean toward resumed inflation (headlines at least, and trades at best) with the classic situation of a warning below the surface.

That warning is the duo of the USD and the Gold/Silver ratio, doing damage to the precious metals complex first and foremost (which, those with experience know for a fact is normal) and as yet just a potential warning on the rest of the macro. This stuff goes on beneath the surface of things and can extend long enough to get every last dogma spewing perma-bullish gold bug promoter to walk the plank at the tip of the swords the gold bug crew have drawn on them while the cyclical macro stays happy indefinitely.

If USD and GSR go bullish and if logic holds, commodities would be next in line to get the pressure because a rising USD and GSR would indicate Goldilocks at best (for a while) and disinflation/deflation at worst. Yet still, it is the inflationary stance that holds sway at a 60-70% bias thanks to the 30yr yield Continuum and inflation expectations (not to mention inflation data).

In other words, after all this noise we are basically where we were at pre-Jobs, except with the precious metals at a precarious point, fighting to hold last ditch short-term support areas.

See you next week.