Well, the knee jerk about what everybody already knew (generally speaking about the Fed’s taper/tightening cycle) continues. And now with Treasury yields still ramping, barring a fantastical reversal of the futures it looks like short-term support levels may start breaking in Tech stocks, and gold is getting hammered. Silver too.
Tech stocks have the trend and can drop a good bit and still maintain major uptrends. Gold and especially silver on the other hand, never did have the trend. It almost seems too routine to have gold tank in face of the Fed, given the seasonal average of 30 years is positive. But as we note repeatedly about seasonals, any given year can deviate from the average.
Let’s take a brief look at various items in the face of a correction that is not surprising because as we’ve noted for the last year, the markets have been structurally over-bullish, a sentiment condition created by the inflating Fed and now being addressed by the hawking Fed. This is where high cash levels come in and folks, I can’t see how (speaking personally) they will not be higher today.
If 2021’s opening goal was to preserve 2020’s gains, 2022’s opening goal is to preserve as much of 2021’s gains as much as possible while not panicking out of core holds, few though they are. I am also going to consider looking for short setups, but only to keep balance in the portfolio.
Gold & Silver
As I’ve belabored, gold is bullish on the big picture, in a large Cup & Handle pattern. But the ‘handle’ is the trick. It is a bull flag and bull flags go down, not up. We have been allowing for gold to drop to the 1500s within that bullish big picture to complete the handle. Silver is sloppy and trending down. The miners began to lose the bounce posture yesterday. I sold a couple items yesterday, one a bottom feed spec (BTU.V) and the other being EMX as each bounced. If the bearishness persists more selling will be done aside from core (MAI.V, GBR.V, GBRR.V).
Those long-term yields are rising. The correlations to rising yields noted in this post show that commodities tend to rise with yields because yields tend to rise with inflation expectations. The trick here is that at some point the Fed may get what it wants (to my mind, at least), which is the herds piling out of stocks and other inflated cyclical assets like commodities and into Treasury bonds. In other words, as the Fed tapers a new buyer must emerge for that debt. Enter the public, rushing out of assets and toward liquidity. Since commodities reflect inflation, I’d have a good bit of caution here as well if the machines truly are buying what the Fed is selling. The other play is that commodities could remain composed and flaunt the inflation trades in the Fed’s face. So, it’s not yet cut and dry.
The story in the short-term seems set in stone (so say the machines). Out of growth and into value. Yields are rising and we’re at a late stage, after all. I was wrong in viewing the over-valued growth stuff as a potential seasonal (tax loss) bottom feed trade and I’ve mostly undone that taking a couple profits and a couple losses. It looks like a couple more losses are in order. Take note there however; if this turns out to be just a hard but routine correction Tech/Growth may take leadership once again coming out of it with the herds suitably chastened about their lust for the inflation trades. The other option is that the most over-valued stuff is and has been leading the markets to a real bear. You know, bear markets can and will happen.
The market will probably try to rotate to defensives, but as we’ve noted in NFTRH they’ve already been doing that into Staples, Healthcare, Utilities, etc. Value stands to do best but if they start marching everybody to the woodshed, they’ll eventually get to value too.
Global has already been leading this, on balance. The mixed bag has been getting heavier and now it appears the USS Good Ship Lollipop is finally getting caught up in it.
2000 Road Map
First they took out Tech (and Semi, although Semi now is not the same Semi as then, but will the market care?). Then they came for the Dow and SPX, and a bear ensued. Meanwhile, gold bottomed and turned up and led the whole shootin’ match to a new inflationary cycle.
But back then gold had just emerged from a 20 year bear market. Today it is technically in year 7 of a new bull cycle (and year 3 since the break above the 1378 bull pivot). But at some point if the Fed is serious and winds up cracking the macro, gold should emerge first (and break the handle). It may be early now, but there is a rough road map in case things get significantly worse than just a week with a ‘Fed minutes’ mini hysteria going on. If the macro goes bad, we focus for real on the precious metals, as opposed to this ‘bounce’ crap we’ve been on.
More to come and I’ll refine the view daily/weekly, but markets are in motion and painful though it can be in the short-term, that is what I personally live for as a market participant. Motion, baby. Motion. If the motion is enough to change the macro, so much the better.