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Inflation Redux?

It is a valid question, given all the noise about inflation over the last couple of weeks. This was driven by the theoretically cost-pushing January payrolls report, CPI and PPI. All were elevated in January. Rather than try to guess (mine is that the trend away from inflation will resume after this bump in the road) we should let the indicators advise.

It is not as if I am a deflationist or an inflationist. I am an indicatorist. In 2021 we targeted upside to 4% on the 30 year Treasury yield (Continuum) because the yield’s technical situation and the macro fundamentals at the time (highlighted by the Fed’s massive ramp job of money supply and its own balance sheet) advised so. In other words, the indicators of the time advised so.

Today with YoY money supply growth tanking, M2 rolling over, the Continuum having hit (and exceeded) target and pulled back, yield curves extremely inverted and inflation expectations having long-since topped, the indicators have been pointing disinflationary. Last week was an interruption, but using the bond funds in Friday’s NFTRH+ update as an example, if the indicators flip we will have to flip. They have come close, but they have not flipped.

That’s all I got for now. That and patience with the process.

US Stock Market

We have been hammering away at macro indicators (disinflationary w/ recent inflationary interruption), sentiment (over-bullish and as such, a risk) and technicals (bear market rally intact with a potential stopping point close by and a less favored one that would involve a test and failure of the all-time highs if the bear market remains in place and a much less favored view that the bear may have ended (way too early for such talk on this sentiment reset rally).

So this week let’s trim down rather than beat ourselves up with too much info. We are square with the markets and waiting for said markets to advise. Let’s take a look at SPX and then move on to some stock talk (or stonk tonk) and the rest of the report.

SPX has halted at a clear resistance area. The mini trend from October is still up and so the Q4-Q1 rally is still intact. The major trend is still down. That is by the proximity below the August high. If the rally means to at least fill the 4219 gap and test the August high that is still technically viable.

But first SPX could drop to test the moving averages if not support just below them at 3900. RSI and MACD are postured for that possibility and as such I took a short position (SPXS) against some longs still held. It would be very temporary if the market finds logical support and I could press shorting further if the market starts to break down. Again, it’s your move, market, not mine.

S&P 500 index, daily chart (SPX)

US Market Sentiment

As you can see, the week ended with market sentiment still unfavorable from a contrarian standpoint. Dumb money is only now starting to roll over. I see 5 waves up on the chart above and maybe that is all she wrote. It could also be an A-B-C bear rally having completed. This persistence in over-bullishness despite the unspectacular rally to date breeds thoughts like that. Sentiment is not a timer, but it is a condition and in this case ‘over-bullish’ is a condition to a potential top.

As a side note, check out the extreme contrary positive sentiment situation in bonds. That is a sentiment-based rationale indicating that maybe the bond funds in the NFTRH+ update linked above may indeed hold as macro indicators. Wildly over-bearish sentiment can’t hurt, at least.

Smart money and dumb money sentiment
  • Investors Intelligence (newsletters): Spiked to a new recovery high as of Feb. 14. Not extreme, but not contrary positive either.
  • AAII (Ma & Pa): Also spiked to a new recovery high as of Feb. 15. Not contrary positive in the least.
  • NAAIM (investment managers): Spiked to a new recovery high as of Feb. 15 and is briskly bullish. Guys, I was half joking when I first ID’d the Inverted H&S potential on SPX back in December! It is delineated on the lower panel chart of SPX and is the main reason we allow for a more significant bear market rally.

US Stock Market Bottom Line

Q4-Q1 bear market rally is intact. There is risk aplenty, from technical risk (SPX is near a viable target zone, after all) to sentiment risk (players are improbably very bullish).

Short-term pullback potential has increased with the brief rise above and drop back below resistance and the bloated sentiment picture, that could use some fixing.

Meanwhile, elements of this rally as noted back in Q4, 2022 were…

  • Extreme over-bearish sentiment (now over-bullish and contrary negative).
  • Relief that waning inflation signals that would knock the Fed off its hawkish stance. At least that would be the hope of angst ridden casino patrons. Well, the bump in inflation signals did no favors for that prospect lately.
  • The mid-term election cycle, which on average is positive for an extended period. This one is still a positive as I believe even a year later the returns are good. But this is on average, through bear markets and mostly bull markets. There are no absolutes, especially when taking quants on history. There are always odds that exceptions could be in play. But at face value, this is an enduring positive and here is another one…
  • If I am right that the recent inflation mini-hysteria is not a new trend, “Fed relief” could even make a comeback.

The Q4-Q1 rally is not dead, but it does have short-term corrective potential.

Stonk Tok

If the disinflationary view reemerges and if the stock rally continues to be intact with a Goldilocks flare to it, I’d expect Tech stocks to continue to lead. Tech has led in the young year of 2023, after all, as we’d originally envisioned when projecting a fade in inflation and its companion, rising yields.

qqq/spy ratio

Within Tech, Semi continues to lead. Nothing new here, although I released the last of my Semi stocks, taking the profit AMAT offered. But insofar as I’ll be bullish for the rally’s resumption either sooner or later, Semi remains a favored area. Within that, the Equipment stocks like AMAT, ASML, LRCX, KLAC, etc. would be favored as they will provide the tools for the next cyclical upturn.

Precious Metals

Let’s bump the sector up in priority now that gold, silver and the miners have in essence smacked our downside targets for the correction. As with the bond funds from the update linked in the opening segment, the precious metals do not have much more room in order to keep the existing view in play. It is time for the sector to hold and start to lead. That will very likely depend on renewed Fed hawk fears being just a blip, not a new phase.

Internal indicator the HUI/Gold ratio (daily chart) stabbed to a lower low to the December low but by the end of Friday had hammered back above it. The indicator has been beaten like a rented mule, but it is still intact.

HUI’s monthly chart shows a drop down into the support area of 230 (+/-), with the minus having registered 220 before closing at 224. Huey is at support and needs to stay that way, otherwise my note on the chart “Consolidation #2 ends” will be proven wrong.

For a closer view let’s go back to the daily chart of GDX, which we’ve been using to gauge the details of the correction. If we assume the macro holds intact (a waning of inflation signals and relatively weak cyclical markets would be helpful here) then GDX has done all we’d asked it to do for a healthy correction.

It followed the bullish (ha ha ha) Golden Cross with a hard smack down to punish anyone who would believe in that TA novelty. It filled the downside gap (only a disaster and likely a loss of macro fundamental standing would drive it down to fill the gap near 23). It is now poking the convergence of lateral support and the 200 day moving average. This was the target zone and it needs to hold or the “healthy” correction plan would be kaput or at least put off for another day.

I added AEM, got clobbered on earnings and then increased the position. Before that I added BTG on its drop after announcing the acquisition of Sabina Gold & Silver, and increased it on Friday as well. So I am sticking with the “healthy correction” theme until compelled to drop it. The macro fundamentals have degraded, but that (renewed inflation and Fed hawk fear) is the very thing that exacerbated the “healthy” correction. Something was going to do it. It might as well have been the miners’ mortal fundamental enemy, cyclical inflation.

The recent bump in inflation is cyclical because part of the story was the booming jobs report and the other was rising costs. We did show how rising markets in some cases contributed directly to January’s rising costs in this post. So tell me again why we’d want to see cyclical markets fail or under-perform gold if we are going to be longer-term gold stock bulls?

I want to be ever more careful about what I hold. The market did not like AEM’s results, likely owing to Kirkland Lake not performing to expectations. But I think it’s a quality situation operating in mostly safer locales. I have word from friends much more fundamentally engaged (with individual miners’ operations) than I telling me that BTG’s Columbia property is a non-issue. I think that company is run by a really smart (if bar brawling) operator.

Other items held are OGN.V (OGNRF), which I trimmed some profit on, MAI.V (MAIFF), which is perma-waiting for the weather to come around (I can wait too, with a moderate position for now), and AGI, which I’ve held a full position on despite its elevated stock price.

Gold (daily chart) has ticked only the initial support shelf at 1820. But we are allowing for the SMA 200 (currently 1783) to get dinged within an intact structure. If that happens though, we’d want to see the HUI/Gold ratio hold up. In other words, it’s time for the miners to start leading even if gold probes lower in the short-term.

Silver (daily) has done very good work as it dropped near and hammered from just above the SMA 200. As a side note, Hammers are another TA novelty that I’ve noticed over the years often does not do what TAs often insist it does. In this case, imply an immediate upward reversal. What I have actually noticed is that as often as not, it is followed by more grinding at best and even short-term downside in some cases.

But generally, this is good work by silver and it was enough for me to buy back PSLV on Friday (my default with silver is usually the metal as opposed to the miners). As for the latter, I have an eye on MAG and SILV, as usual. Maybe HL too.

Back on the metal, as with the HUI/Gold ratio, we’d like to see silver start leading gold as a sign the correction could be ending.

Precious Metals Bottom Line

Do or die, baby! Well, that may be a little dramatic. But generally, the sector is fulfilling its obligations for a healthy correction and pending some more grinding around it is time for the sector to hold the general areas (+/-) that it hit last week. I have no problem waiting, but it would be convenient if this were to be the last good buying opportunity for a while, as originally projected. Per the monthly chart above, barring failure at current support HUI’s target is 500 over the coming year or so.

Global Stock Markets

On balance global is doing what it is supposed to be doing in face of a rallying US dollar. The front end of the Q4-Q1 rally saw massive out performance by Global. Shown here is the World (ex-US) ETF in relation to SPY.

Just as Uncle Buck may have more short-term upside, ACWX/SPY could have more short-term downside. It is in a little ‘W’ pattern, so it could well bounce. But a drop to test the SMA 200 would not kill the rally in global relative to US, unless USD is on something more than a bear market rally. For now, the bias is still toward USD bear rally, not a new and persistent bull phase.

Inflation & Commodities

The news is full of articles now discussing how food (Staples) producer prices are going to continue rising, how warehouse and distribution channels are pushing “inflation” higher, how charges to use cargo containers and transportation are all pushing “inflation” higher.

The inflationary acts were committed in 2020 and 2021. The inflation was inflicted then and is now history. What is happening now is a plethora of knock-on effects from the inflation. It’s lagging, sticky and in some cases opportunistic and greedy stuff that is not inflation but instead, the predictable after-effects of it.

What, did we expect that entities given license to mark up their profit margins (or at least try to maintain them for investors) would choose not to do so in the face of pervasive inflationary headlines? It’s an excuse to take the opportunity to PUSH costs. What economists call “cost-push inflation”. They have license to push costs, but it’s not the inflation, which happened already. That matters. Or it will matter.

This graph deflates M2 money stock by the CPI. “Real” M2 is rolling over harder than nominal M2. To me it represents the mature stages of the inflation situation, where the Fed is trying to reel in its past actions while “sticky” prices persist. It’s also a picture of Stagflation, for however long it does persist.

m2 money supply adjusted by cpi

Commodities and materials are the elements of consumer prices. From Oil/Gas to Wheat/Corn to Copper/Steel… commodities are the cyclical bedrock of consumer prices. But the “cost-push” is coming from services and related industries as they look backward at the inflationary effects into 2022 and promote them for all they are worth. And insofar as pricing power is the goal, they are worth a lot as long as the public believes them in its current inflationary mindset.

Yet here the CRB index still resides, trending down after making a top last spring.

Oil & Gas: Oil is back below its 50 day average and trending down. Gas is still in crash mode. Seasonal positive or not, bounce potential or not, its in a terrible bear market. Energy commodities are not currently responsible for inflation. The inflation in Energy has come and gone.

Agricultural: GKX also topped last spring, although it has stabilized of late and is technically neutral. With GKX below its now down-trending SMA 200, there is certainly no cost uproar happening in Ag commodities. Now, the supply chain and services? That’s a different matter. Cost-push license is at work.

Copper & Industrial Metals: The China story and its own depleted warehouse stocks have bolstered Dr. Copper, which maintains its intermediate-term bullish trend. The wider industrial metals patch (GYX) is somewhat weaker but not yet broken from its intermediate trend either. A lower low to the January low (437.54) would accomplish that (current index price: 451.73). Copper has been leading the cyclical relief rally that we’ve dubbed the Q4-Q1 rally. It should be watched for signs of continuation or failure.

u3o8: The uranium segment (URNM, URA) enjoyed Cameco’s results and popped but ended the week with a short-term unpleasant look on its daily charts. This is in contrast to the commodity, which ended the week with a positive look (ref. Sprott u3o8 fund SRUUF). Uranium is a wildcard and a special situation and often goes its own way within the commodity complex. Uranium price is long-term bullish coming out of a multi-year base but in consolidation.

Lithium, REE, Palladium & Platinum: Premier Li producers LTHM & ALB rammed upward on their quarterly results last week and then were unceremoniously hammered right back down, punishing anyone who would have tried to momo the results. Recall I had already taken profits on each of them, but for now they remain only on watch (ALB is the more technically constructive of the two). As a side note, the Li price has been dropping since November and is currently at support, which needs to hold at this still long-term elevated level or there would be more pain to come.

REE sees the fund REMX having broken back into its ongoing downtrend after a vigorous bounce and watch list item MP more constructive as it tries to hold its downtrending SMA 200. Still not great, but better than the fund. Palladium is firmly in its downtrend and Platinum has tanked out of its intermediate uptrend back into a technically neutral situation with a bearish bias.

Does much of the above sound like an inflation problem? Copper remains bullish on the short-term and that is a warehouse supply situation with the demand side of the equation yet to be determined. Uranium is stable and that is a long-term structural situation (as would be the likes of REE, Li and even Cu with respect to alternative energy and in the future, the after effects of war and assumed rebuilding).

Inflation & Commodities Bottom Line

The headlines are one thing (as they amplify services and related industries ‘cost-pushing’) and the commodities themselves are quite another. The YoY money supply has tanked, M2 has topped and started to roll over and M2 deflated by CPI is dropping. It may be only a matter of time before today’s inflation-phobic herds will one day fear the opposite. A pricked bubble, after all, cannot reinflate itself.

At times like this it is important to think for ourselves, and not let the headlines think for us. Time not to be a robot. Time to be a forward looking speculator. This is not to say that deflation will be the dominant long-term force going forward, especially if governments get involved in trying to rebuild (commodities are those building materials) war torn regions, but it is to say that our theme – fading inflation into disinflation, possibly into a deflation scare – is still alive and kicking as we watch the indicators noted in updates last week for confirmation or negation.


USD took out the daily SMA 50 and then faded a bit on Friday. But that proximity above the SMA 50 is key to whether or not it can reach our target of 106 and a 38% Fib retrace. USD partner, the Gold/Silver ratio is having a grind at its SMA 200 and should be watched closely for macro signals (up likely to = more macro pain, down = potential relief).

The weekly chart shows our rough plan for the future. This is just a speculation at this point so please don’t take the man staring at his chart overly seriously. But it is a viable situation where we’d look for the current up leg (A) to halt at or below 106, pull back to a higher low (market relief w/ a decline to ‘B’) and then head upward on a strong bear rally to ‘C’, which could wreck markets and bring about a new low in SPX and possibly a bear market bottom. It’s a plan, eh? Let’s be open to alternate plans as well, but consider this guide as long as it is viable.

I am not going to waste time with Bitcoin this week (it is on its bounce with a target around 30000) as I don’t consider it more than a speculation and crypto in general, a promotion. So moving on to the cavalcade of global currencies we find everybody bending to the will of Uncle Buck, as would be expected.

CHF is gold’s partner and that hammer should mean something or gold would lose a running mate if CHF/USD rolls over. JPY has already done so and EUR is posturing that way as well. The commodity currencies of Canada and Australia are neutral and bear biased, respectively. The GBP looks like a short, frankly.


Savings account is in cash and balanced by gold, as usual.

Trading: No positions after covering RGLD short.

Roth IRA (non-taxable, no contributions)

Cash is 84%, but positioning includes two shorts. So it’s not like I am playing bull-boy here. Not with that sentiment profile on the broad market. I released SHY because cash is ‘no-lose’ right now, but still hold the T-Note per below. If the contrary positive noted in the Sentiment segment plays out, however, Treasury bonds could again take a rally. Considering the inflation headlines that have made a comeback, it’s viable.

Insofar as I am slightly positioned in the markets I am watching closely to see if the precious metals complex holds its “healthy correction” status. If so, I’d likely press longer into the next rally. If not, I will admit my mistake and await a future bull phase. But for now, if it (current plan) ain’t broke, why fix it?

Non precious metals positioning continues to slant toward what I think of as the disinflationary Goldilocks stuff, which would be Tech/Biotech/Cloud, etc. We shall see. The portfolio is up a resounding 1% on the year so far, and I’d obviously like to start compounding that. But if it hints to go the other way it sure does help to have the green stuff, cash paying increasing income.

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