As the yield curve continues to be wildly inverted (implying hawkish Fed in control) short-term yields (2yr) are continuing upward toward the November high and long-term yields are continuing the break upward from consolidation. Folks, Fed hawk fear is back in play with the recent bump in economic data implying inflationary pressure.
But I’ll continue to view this as a bump in the trend toward the end of the inflationary phase. The problem being that the Fed is fighting the last war because it has to. It blew (printed) the indicators out to the inflationary upside and all it knows how to do in the face of rising price signals is continue to try to put speculators into the thing they hate most, cash.
When the dam finally breaks, it is likely that the herds will thunder into cash, drive short-term yields down and steepen the yield curve. That is when we will have change, a macro pivot if you will. But for now, it’s Fed in control, patrons transfixed and in some case paralyzed, and it’s just the situation we’ve got. Risk is high, but not yet realized.
Cash rhymes with crash. In my opinion, while maybe not expressly seeking a market crash, the Fed is aware that it could result when a critical mass of casino patrons finally gets the memo that this ain’t grandpa’s market anymore; a market where every sign of distress was met by a micromanaging and benevolent Federal Reserve. My view continues to be that the Fed really fucked the duck this time and that is where the Hoye squirrel may actually find his “post-bubble contraction” nut. Hence, why we are open to gold stocks, fundamentally.
But nothing goes in a straight line. At this time the trend of waning of inflation signals is being interrupted by a renewal of them. The Fed is compelled to hawk. The markets are dangerous. Cash is paying.
Let’s look at a few key items in pre-market (ES, Gold, Silver, GSR & USD).
ES is pulling back from a logical (lower high) area that could have ended the Q4-Q1 rally already. I’ve been looking for an SPX gap fill and test of the August high at least, but this chart is currently in a stance where it looks like it could drop to test SMA 50 (dropping in accordance with the supposedly bullish Golden Cross, no less). RSI and MACD do not look good as RSI slips below its supportive moving average and MACD triggers down.
Gold is dropping toward the first clear support area, as if on cue. Remember, we are also open to a decline to the 1780s and the SMA 200 within a still intact technical structure. Below that would be ‘something else is going on here’ levels.
Silver is already about to ding the clear must hold area from 21.10 down to 20.50. It is time once again to watch silver. A failure by silver would likely mean a failure by the precious metals miners. A hold and eventual upturn, the opposite. One thing I will say is that this, the way we are feeling right now, was always going to be the way we’d feel with these markets dropping to preferred targets.
Gold/Silver ratio has taken out the SMA 200. This is clearly negative macro signaling. If at some point we see the GSR impulsive up and towing along the USD, we might also see some serious pain in asset markets (but not in cash).
Finally, Uncle Buck looks like it is eyeballing the preferred upside retrace level of 106, which includes the 38% Fib, the SMA 200 and even that little red dotted trend line, for whatever that’s worth.