NFTRH 696, part 4

The final segment of NFTRH 696.

US Stock Market (TA)

Here is a look at the relative performance of some US sectors. Healthcare, Utilities, Staples and Pharma are considered more defensive and they are out-performing SPY/SPX. The median stock has stabilized as participants are shooting the formerly high flying over-owned, over-valued headline stocks.

Importantly, let’s recall that in the history of the last 3 occasions that Healthcare bottomed vs. SPX/SPY a cyclical bear market ensued twice (2001 & 2008, while in 2011 the signal coincided with a turn away from the inflation trades as nominal SPX did just fine).

Nominal views of different areas within the market show all items suspect, at best. In the cases of Mid and Small caps and Growth the intermediate trends (blue SMA 50) are down and as long as the prices remain below the SMA 50 the signal is intermediate-term bearish. Value and Banks have not turned the SMA 50 down yet because they benefited previously from the rise in long-term yields, which have been pulling back of late in the face of Putin/Ukraine.

Back in late 2021 we had noted two downside gaps that could eventually fill on both SPX and NDX. The combo of a hawking Fed and a bombing Putin have helped drive these indexes to fill the upper gap, with the lower one still beckoning. As you can see, aside from the Semi index these headliners are now in a clear series of lower lows and lower highs.

We have been on a bounce (only) from the spike lows and reversal at the end of February. But it looks like a classic short setup in the making. Personally, I have been hoping for one more thrust upward in order increase shorts (holding only a short against small caps, TZA) because I am not a stout bear and prefer cash unless it looks like a low short-term risk/reward. Using SPX as an example, and assuming no war relief/Fed relief inputs, one more thrust upward (if applicable) by SPX to the converging moving averages would be such a setup. Let’s call it the 4525 area (+/-). That way, if shorting at that point risk can be managed to suit above the moving averages.

Beyond that, let’s watch for those lower gaps to fill if/when the bounce fails. Then with those out of the way it would be time to at least consider a bullish outcome and buying opportunity.

Global View

In the first segment we reviewed the bearish daily charts of the DAX and the global (ex-US) ETF, ACWX. But folks, how bearish is this monthly chart of ACWX?

Exactly. It’s not bearish. It is market excess being corrected to a potential buying opportunity at 47. A drop from 57+ to 47 (+/-) would represent nearly a 20% correction and since that is the arbitrary percentage to which financial media assign the term ‘bear market’, it would be nice to see indexes, ETFs and individual equities at such levels while the media scare the remaining herds out of the markets. Best of all, and as with the daily SPX short setup noted above, there is a clear line below which risk can be managed.

Stock market (TA) Bottom Line

Our original view of this correction was as a buying opportunity in a small cyclical bear market at worst. I see nothing in the work above to change that view. Bring on the doom-saying. Let’s embrace it, while also not setting any plan in stone (hey, it sure could be a major bear) in a schizoid market with emotion running rampant.

Sentiment

VIX is building pressure on the markets as it continues to grind its new uptrend. Weekly SPX in the upper panel is in a wedge that could fill the gap and hold support in the 4000 round number area. However, using ACWX above as a model, the equivalent ‘cyclical bear market’ support for SPX is around 3400. That would represent a much deeper correction than 20%, however, and so for now let’s favor the 4000 round number and gap fill.

AAII remain contrary bullish as its members are very bearish. AAII is not the reliable indicator it once was, however. NAAIM is in my opinion more reliable because investment managers NEED to try to be right with the markets lest they not be investment managers (of other peoples’ money) for long. Well, they are right with the current decline, almost to the bearish levels of 2020’s COVID crash. When we see indicators like this flashing while markets drop to clear long-term support, we’ll likely have a buying opportunity.

The Sentimentrader Dumb money indicators are biting on the bounce, which is not positive, but interestingly, Smart ones are very engaged at the highs, which is quite positive. Let’s read it for now that the bounce can labor on, potentially to a clear shorting/selling/cash raising opportunity. But let’s also realize that sentiment has already come to points that could coincide with an end a routine bear market.

By way of Yardeni, let’s check in on newsletters and let’s also let out a loud ‘WHOA!’ as we see this herd, which prioritizes looking right with the markets probably more than the NAAIM, in full flight away from equities. This is a buying opportunity folks, with the main question being from what levels? Bears are emboldened, bulls are in full retreat and everybody’s on the correction/bear train. The…

…hype train. Sorry, I could not resist making a point. The hype is bearish and it is pervasive. Sure, it’s with good reason, but these are the markets and they are soulless and cruel. Sentiment extremes get punished eventually.

Sentiment Bottom Line

Contrary bullish, but if our downside TA targets are accurate it can get more so. Meanwhile, the above does support the view that the bounce can continue in the very short-term (pending whatever the headlines may gross us out with over the weekend).

Precious Metals, Commodities & FOMC

We reviewed the bullish objectives for gold, silver and the miners (HUI) in the second segment. The week closed with that status, but also with the same risks involved. Gold has taken the other side of the fear trade as the headline indexes drop (pending the labored bounce) and fear envelops the planet. Insofar as current TA and sentiment trends remain intact, we’re looking for gold to 2000+, silver to 30+/- and HUI to 325.

What’s more, I think there is a good chance that this is the start of the projected 2022 bull phase for gold and the miners. The first impulsive launch. However, when the acute phase of fear ends – and it will – the PMs will be quite vulnerable to correction, at least to test the parameters of the new bull phase. That could mean gold dropping back to the 1920 area (current: 1966), HUI to the 280-290 area (current: 304) and silver to the low-mid 25s (current: a lagging 25.80) if they do indeed ding the upside targets, near-term. Let’s remember that the seasonal goes negative around the current time frame.

As for commodities, well EVERYBODY NOW KNOWS that the inelastic demand vs. supply chains in crisis (as exacerbated by war) is the play. CRB index closed Friday a hair under 300, which in my book puts our long standing 270+ target to bed. Now CRB is surging for the next resistance area, as stimulated by global mania. Commodity/inflation promoters, err bulls are going to ‘commodity super cycle’ you to death. They are going to pull out von Mises and the Austrian economic handbook and they are going to reign heroic with an avalanche of ‘I told you so’s’. At least that is how I view them. They are all over Twitter, louder and louder claiming the end of fiat.

Which brings us to the hawking Fed, which will likely not be deterred by the war input, especially since the inflation problem is being exacerbated by said war. Sure, it has driven Treasury yields down lately but it has also renewed inflation expectations, the Fed’s worst enemy.

While I am long some commodity-related items in Uranium (CCJ, NXE, URA), metals (PALL, PPLT, HBM, ERO, TLOFF), Energy (NOG) and the Ags (DBA, MOS) I am going to lay out a personal plan to button things down prior to FOMC on March 16. In the best case scenario, commodities keep going up or at least remain firm until then (as if daring the Fed) and precious metals approach or hit the near-term upside targets. Maybe even the broad market bounce would grind on until then.

Then… CASH RAISE.

It’s a plan. I am trying to manage this mess in real time with sensible plans. But since I can’t control an increasingly out of control world I am sure there are other viable plans as well (one of which being 100% cash). But this one is working well so far. I am actually a little surprised at how well the portfolios have been holding steady (Model, Savings) and rising (IRA) amid global upheaval.

For reference, with respect to the items covered above. Daily chart…

As a side note, and one arguing against getting too deeply involved with the inflation bubble longer-term, we find the more risk ‘off’, less inflation-sensitive, counter-cyclical Gold vs. RINF still looking to bottom.

FOMC

The Fed is a vampire. This vampire sucks the life blood out of what would be a normal, productive economy. It sucks its blood by inflation, by printing funny munny as needed at every correction. It has to do this because the system that has been set up runs by monetized debt, leveraged to the max. But that leverage only works when inflation is not threatening to drive bond yields up impulsively, because it is bonds that are the tool of inflation. If/when bonds go bearish for real the gig is up. That would be the von Mises ‘crack up boom’ and hyperinflation. That must be avoided at all costs, as it would incinerate the Fed’s regime of macro control. All in my tin foil hat wearing opinion, of course.

If all goes according to the plan I would assign to the Fed and if things run approximately as they have through recent decades, then at some corrective point frightened herds will beg, demand, INVITE the Fed to inflate once again or at least back off its hawkish stance. The vampire needs to be invited into your macro house. It is so cynical about the inflation it creates. It must be viewed as a savior, for the people.

Right now, in my opinion the Fed is dangerous. Like a cornered animal. Fed watchers at the CME are forecasting 99% chance of a .25% hike. This paltry figure is probably compliments of Putin’s rampage into Ukraine. The 3 month T-bill yield has backed off just a bit but combined with the ramped up 2yr yield, the signal is still telling the Fed to GET OFF THE GAS! In my opinion, as long as this remains the case* they need to raise rates, and not just by a piddly .25%.

* Hence, why I believe the Fed would welcome a market liquidation of some notable degree. A market liquidation would send heretofore enthusiastic inflation traders into T-bills and short-term Treasuries, alleviating the pressure. Funny how that works.

See you next week with updates (as applicable) and next weekend with a normal format NFTRH 697.