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Summary of NFTRH 756 and the macro situation leading up to it

This week please see the report below for a potential major theme change. If this were to come about (it’s still an “if”) it would feature…

• USD losing its short-term double bottom support and tanking to bull market correction point ‘C’ per the Currencies segment.
• Silver would be expected to continue leading gold.
• The implications would be that global stock markets would be favored over US markets, although certain ‘anti-USD’ flavored US sectors could out-perform.
• Commodities could find support, rally and even potentially break their downtrends.
• Precious metals could follow the 2003-2008 model as the miners would no longer be anything special (as they have been in leading the rally from Q4, 2022) but could tack on some appreciable price increases as part of an anti-USD trade.
• All of this would likely be much more compact, time-wise, than the 2003-2008 period as USD remains in a long-term bull market. It’s just that there is a good amount of downside should USD (current: 101) take a hit to projected support (93.50).

Meanwhile, our existing macro view sees USD clinging to initial support, commodities trending down, US stocks struggling and global markets hinting at the potentially bullish theme we introduce this week.

US Stock Market

The Payrolls party on Friday did not release suspect sectors/markets from their bearish bias. For example, small caps (IWM) put on a good bounce within what could be a resumption of the major daily chart downtrend (black SMA 200). Ugly pattern aside, IWM bounced beneath the down-turned SMA 50 (blue) and I shorted it there (using 3X inverse fund TZA). Taking out the SMA 200 on the upside would probably compel me to to release the position, but as it stands now it’s not only a bearish look, it’s a downtrending market segment.

Again I’d note that shorting is something I want to poke at with this market, but with cash and equivalents paying surefire income, in my opinion most people should only short stocks as speculation or not at all, and not as a primary function.

I held my short position on XLI, which is in a Diamond consolidation pattern. The tolerance is the upper line of the Diamond. A Diamond is a consolidation pattern but not necessarily a bearish one. The word from the TA godz is that it can break either way. With the volume profile showing distribution I am speculating that the direction upon breakout will be down.

Another sector I am short (via SMN) is Materials. What I like here is the lower low and lower high per the red arrows. But I’ll let the area that includes the trend line and the most recent high be my tolerance on holding short. In other words, take out 82 and the trade fails. But I did not even think of letting Friday’s short covering rally force me to cover.

As for shorting the markets, some of my best learning about markets began in spring of 2003 when the 2000-2003 bear market ended. By 2004 I was well trained in understanding that markets are just ‘price’ and that having a fundamental conviction about where that ‘price’ should go does not mean it will go there. That held true for the better part of the next two decades, until 2022.

I often talk about how faulty an active market bear I am due to psychological vulnerabilities, but it’s probably more about the fact that the Fed and fellow central banks have rescued financial markets at every bearish turn. My current bearish speculations and those going forward would be predicated on that no longer being the case if the “everything bubble” finally pops. Meanwhile, I also continue to hold a few favored stocks in favored sectors like DVAX and CDTX, a vaccine maker and Biotech spec, Cloud networker, ANET, which got hammered back to support, Medical Device play, RMD due to its chart, and CCJ on my latest poke at a long-term bullish Uranium theme.

Depending on the market, I’ll either be a net seller/short or go the other way. I expect the bearish view to grind into play, however. This is an unchanged view as the Q4>Q1>Q4 rally grinds on.

SPX (daily) continued to hold below the next resistance level (4200). Our favored target has been a gap fill at 4219 with allowance to the 4300 area and a lower high to August, 2022. I see no reason to alter that view for the broad SPX, even as several sectors are slipping. Either way, as we’ve noted for weeks now, it’s a high risk environment and SPX does still maintain the potential that it is making a short-term double top as it has not cleared immediate resistance.

Market Sentiment (US)

The market has one thing going for it after last week, and that is a slight improvement from a contrary sentiment perspective as dumb money indicators faded hard and importantly, smart ones started eating stocks. With SPX holding its daily SMA 50 above, one could envision enough sentiment fuel regained to pop the index to target. However, it appears as if the data below are not inclusive of Friday’s joy fest, in which case the implied bounce is already in play and the indications below may no longer be as supportive, sentiment wise.

• NAAIM: Investment managers were nibbling at the market before SPX dropped to test the SMA 50 and probably gulped down some stock on Friday. They are biased over-bullish.
• Investors Intelligence: Newsletters were still spiked to moderately over-bullish before the downside on Tuesday through Thursday. This reading is also biased over-bullish, but not extreme.
• AAII: Ma & Pa were in sentiment pullback mode on May 3, as the market pullback began. This reading is good for a contrary bullish view on stocks.

US Market and Sentiment Bottom Line

SPX is still technically on its bear market rally, but it needs to clear immediate resistance at 4200 to make an attempt at the 4219 gap and potentially, the 4300 round number resistance. Considering the sectors within this broad measure that are bearish biased, it sure does not seem like a good risk/reward at this time. 100 points upside (barring our outlier target of 4700) vs. 100s of points downside? Not good, if the bear rally assumption is a good one.

Sentiment has backed off a bit from strenuously over-bullish. It is in a mushy middle ground and in the short-term not a tailwind or a headwind.

Market Indicators

Let’s check back in on some important indicators beneath the surface, with a brief summary of each.

For newer subscribers, the most stark picture we view is of the broken trend in long-term Treasury bond yields. For years we tracked a normal picture of implied disinflation against which the Fed was given license to inflate the system at every crisis point. The Continuum in long-term yields is broken to the upside and one implication may well be that the Fed we’ve had for the last few decades may not be the Fed we have going forward. Can they find new and magical methods of market manipulation (MMMM) to ward off the next disaster? Maybe. But also, maybe not. I don’t want to be caught hoping for a benevolent Fed until it proves it has the goods. This chart implies their old tools have been obsoleted.

M2 money supply growth has tanked, YoY. Nominal M2 took another little tick down over the last week. The markets were liquefied by excess money printed out of thin air in 2020. The Fed is reeling it back in by this measure as market forces in 2022 (see chart directly above) compelled them to go hawkish, on steroids. Not good.

High yield spreads are ticking back upward. The 2022 bear cycle came with a downward trend in HY spreads. That was a bullish omen for a coming bear market rally, which is still intact for the main indexes, at least. Last week this spread ticked upward. If it continues upward trouble for markets would be indicated on a flight to safety.

Real yields are rolling over on a YoY basis, while consolidating (and likely topping) on a nominal view. The rising RY implied a Fed in control, plenty hawkish and signaling a Goldilocks economic phase (inflation under control and the economy functioning relatively well). If/as it continues to roll over the Fed’s inflation fighting grip will ease. This would be fundamentally positive for gold, which appears to already be looking ahead to such a condition.

The 10yr-2yr yield curve is once again trying to steepen after the Goldilocks inversion with the Fed in full control. The 2020-2021 steepener was inflationary. The next steepener is expected to be the opposite; disinflationary morphing to deflationary. Our view has been Inflation>Disinflation>Deflation scare and that remains the case, before any talk of the next inflationary phase.

The Copper/Gold ratio is heading in that exact direction; disinflationary and counter-cyclical.

The Equity Put/Call ratio theoretically continues to build pressure against stocks. The stock rally (such as it has been) that began in Q4, 2022 has logically come with a pullback in CPCE’s 10 week moving average (which smooths out the spiky readings in the ratio itself). The problem for bulls is that this pullback is within an uptrend of building pressure. However, a faint hint of positivity for bulls is that the EMA 10 made a lower high before the most recent pullback. Well, I said it was faint. But given the sad history of market perma-bears, we’ll surely keep an eye on it. A breakdown in the EMA 10 would imply that bears remain an endangered species.

Currencies & Global Stock Markets

Folks, we noted above that the Equity Put/Call ratio implies a faint positive for US stocks. Well, the state of the rest of the world largely depend on the fate of the US dollar, which, if it were to break down, would favor global stocks generally over US stocks, but also some US sectors, like a couple that I am short of, Materials and Industrials. Here again is the correlation of global stocks to inverse USD.

The correlation between the World (ex-US) and the inverse of USD is compelling. If USD breaks down, do not be short global stocks (on balance) and indeed, prepare for more bullishness, perhaps with the deeply lagging likes of EM and Asia playing catch up (and as a side note, the Canadian TSX-V holding support and rallying). Yes, we are describing a new inflation trade of sorts.

I am now following a stream of consciousness that this week’s indications are prompting right now, in real time. In short, it’s got the potential to change the main themes of our analysis. Right now, it’s just potential, but OPEN MINDED is better than cement headed.

The SPY/ACWX ratio (daily chart, US vs. World ex-US) looks like it is topping out. Let’s take this seriously. If USD were to go further bearish rather than hold support this ratio would likely break down.

The longer USD (weekly chart) sits here failing to make a short-term double bottom, the more potential there is for it to crack its neckline and spring a global party in stocks, commodities and precious metals. GSR edged out of the sharp pullback wedge but is floundering around, ticking a new low last week as CME Group currently overwhelmingly projects a halt to rate hikes with rate cut probabilities starting to gain traction in July. Is this how they’re going to bail out the system this time? The old ‘death of the dollar’ play?

We must stay unbiased and if the unthinkable happened with the 30yr Treasury yield Continuum breaking a decades old trend, might not the all powerful Uncle Buck make leg ‘C’ in a bull market correction? Yes, it might. We need to stay open minded. I need to stay open minded, as I have been guiding us to prepare for a liquidity problem, in the US at least.

The monthly chart shows a clear bull market from 2008 intact for USD. It would remain intact all the way down to theoretical point ‘C’ above at 93.50.

As I ponder these charts I realize that there is a lot of bullish fuel stored up should the world’s reserve currency be used as the driver of a significant global stock, commodity and yes, precious metals rally. This would likely not be in fundamental favor of the gold mining industry, but here we recall HUI’s 300+% rise from 2003-2008, anti-USD (and anti the miners’ own best fundamentals amid anti-USD inflation trades).

The Silver/Gold ratio does not have the look of something immediately preparing to rise. But we can continue to watch silver vs. gold for macro bearish or bullish signs. If silver continues to lead gold, the pervasive anti-USD bull thesis would gain traction.

As for global currencies (daily chart), is it not notable that the commodity currencies of Canada and Australia popped significantly last week? That would rhyme with the crazy talk of inflation trades above, if it continues. The weak Yen also rhymes with positive global liquidity if its traditional role as signaler of global risk on/off is still valid in the modern era. Swissy, Euro and British Pound all continue to firmly trend upward. It’s as if Goldilocks would visit the world (ex-US) this time as relatively strong currencies attract capital (much like the US, post-2013).

If the US dollar were to tank (and I am making no such prediction as it clings to support), the Bitcoin speculation could put on a laser show (see what I did there?) of its own. As it stands, however, it is merely bumping the resistance we’d projected as a target all along. Weekly RSI and MACD would not stand in the way of such an outcome.

Moving to global stock markets (weekly charts), everybody on this chart is intact to the Q4, 2022 – Q2, 2023 rally theme. All are above important support.

I noted recently that this man staring at charts could not look away from the Japanese Nikkei and now NFTRH 756 comes in with some possible currency based reasoning for it (potential for USD to drop to point ‘C’ in a bull market correction and Yen continuing to weaken). Regardless, this is and has been a bullish chart.

Also, we find Hong Kong, Asia, EM perched at support. If the USD/GSR scenario above were to play out that support would be a buying opportunity. It will also pay to keep a firm eye on TSX-V as it clings to support. It would be a player in the speculative, anti-USD global trade.

Brazil continues to bias downward but is at support. There’s the Argentina bubble (beckoning the rest of the world to ‘come on in, the water’s fine!). Mexico, bullish. Africa bearish with potential to bounce if the world does, and the Frontier fund poised to bounce if the US dollar drops.

Currencies & Global Bottom Line

This week we open up a whole new and bullish can of worms. Was I late to the view? Not really I don’t think, considering the as yet undecided short-term fate of USD and the as yet ‘going nowhere’ likes of EM, Asia, TSX-V, etc., which are markets that could have a lot of upside if Uncle Buck takes a hard hit.

But consider NFTRH on watch for a potential primary theme that pivots us from the current defensive, risk averse collector of cash and short-term bond income to something more bullish, along the lines of the 2003-2008 cycle that saw a weak US dollar act as the linchpin for China/Asia/EM to out-perform the US as well as epic commodity trades and bullish precious metals.

On this last note, recall that the PMs led from 2001-2003 before commodities and global stocks took over. Today, projecting a potential resumed bear cycle in USD within a major bull market, we’d look for a more compact version of 2003-2008 before the next crash to clear the system.

Precious Metals

I have fallen behind schedule-wise, and so the precious metals segment will need to be clipped a bit. I think that is okay since it is the segment we’ve focused on more than others in NFTRH+ updates, as it has been a leader of the global rally with improving fundamentals. In other words, I think we are up to speed on the sector.

If the bullish stuff plays out per the anti-USD potentials noted above, gold mining fundamentals could degrade as commodities and some stock markets (along with silver) potentially out-perform gold. That did not stop the gold mining sector from rising strongly from 2003 to 2008, of course. But it would revert the miners to being “nothing special” as Bob Hoye’s post-bubble contraction would be foiled again, at least temporarily.

GDX (daily chart) is now favoring the upside gap fill (above 40) as the next option, rather than a downside gap fill below 28. It got repelled on Friday’s happy US payrolls report, but hung in there pretty well. As such, we’re looking upward, but 33 is still important support to that upward look.

Silver’s Commitments of Traders (CoT) continues to show an over-bullish speculative degree equal to the last silver price correction that began in January. However… the degree is not a show stopper for larger rallies. As you can see the green (speculative) line is not yet near the levels immediately prior to the 2020 crash, the mid-2020 high that led to a long correction, or the 2022 excess that led to another harsh correction. So while the CoT is not a ‘contrarian buy’ right now, the show does not necessarily need to end here for the silver price.

Gold’s CoT continues to be more elevated toward risk for its price. This makes sense if we are still expecting silver leadership. However, if you were to dial back further to 2013, we find that historically higher excesses have occurred. So, while gold’s CoT is not as good as silver’s and is at increased risk, it too does not necessarily need to be a show stopper either.

Gold

• Got whacked on Jobs Friday. That was a good excuse for a normal pullback to test short-term support, which surrounds the 2000 round number. Current price is 2024.
• Trend is up, obviously, but the blue sky breakout remains elusive. Taking out the 2020 high of 2089.20 would be a blue sky breakout.
• Gold has been a price leader in the global asset rallies from Q4, 2022. If a global speculative inflationary environment were to erupt per the initial analysis above, we’d expect gold to continue to under-perform silver and quite possibly copper, oil and other commodities. Again, this is speculative and the Copper/Gold ratio sure is not indicating such a thing at this time.
• Gold is bullish technically, and of much more importance, is monetary stability, not a price mechanism.

Silver

• Also got whacked on Jobs Friday. But as per Monty Python, ’tis but a flesh wound’ as silver put a tail on its candle and finished the week in fine shape at 25.93 and still eyeballing the 27.50 area that has been our upside target.
• Initial support is at 24.50 has already been tested and that could be the platform for a rise to or through target.
• We have more important support at the 22 (+/-) area cluster, should a short-term pullback happen.
• Silver, unlike gold, is not monetary stability. It is gold’s unstable little bro. Its relationship to gold will, however, be instructive about whether or not to carry forward this week’s fledgling global bull theme. So, as has been the case for months now, let’s “watch silver”!

Precious Metals Bottom Line

Still in rally mode. GDX targeting 40+, silver 27.50 and gold is targeting long-term value. Oh, and its price is above the arbitrary number 2000, which is a level that many people care about. Globally, despite the recent strength in global currencies, gold’s uptrends as measured in those currencies are still intact.

This week’s potential new theme would, however, start to paint the PM complex as “nothing special” if global assets start to bull, anti-USD.

Commodities

Folks, now I really am running out time. We’ll do a quick rundown and simply note that commodities are trending down in line with the existing analysis of fading inflation, oncoming deflationary pressure and economic contraction. Nothing has changed.

However, if the US dollar tanks its double bottom support, watch for commodities to hold and rally.

• CRB Index: Trending down firmly. This after a post-payrolls bounce on Friday.
• Copper/Industrial Metals: Copper has been in a handle consolidation with a downward bias for all of 2023. But it is above its daily SMA 200.
• Oil, Gas, Energy: WTI Crude is trending down. Natural Gas is still floundering around its crash lows just above very long-term support. Energy sector got cracked hard but bounced on Friday. In not making a lower low, XLE could actually prove to be a buy if the potential anti-USD play introduced this week manifests sooner rather than later.
• Uranium: CCJ maintains its good looking chart and I still hold it. The sector (URNM) is forming a short-term bounce pattern. So, we can keep an eye on the U sector as it sure could use a global anti-USD asset relief play to kick into gear.
• Lithium, REE, Nickel, Palladium & Platinum: Li continues in tank mode, but we did note it to be at support from the 2017 highs last week. Li stocks ALB and LTHM are in a pure downtrend and a potential short-term bounce pattern, respectively. Keep an eye on them for an improving Li view. REE sees REMX making a bounce and MP still hanging around; both within downtrends. I have my eye on MP, as usual. Ni continues to seem like it wants to base and bounce. TLOFF (TLO.TO) is my personal watch item and it is purely trending down but at long-term support. Pd bounced within its downtrend back above the SMA 50 and Pt is pulling back within what looks like a bull flag after ticking a higher high. Watch item SBSW, which includes Au and Li exposure just broke above the daily SMA 200. I am interested.
• Agricultural: GKX popped within its downtrend but supposedly related ETF (DBA) continues to look much better, as it continues to look like a base breakout after a sharp pullback. Still relatively less personal interest here than other commodity areas, but a global anti-USD trade sure would not hurt if it crops up.

Portfolio

Savings balanced by gold.

Trading Account: Short Industrials (XLI)

Roth IRA (non-taxable, no contributions)

IRA is certainly not prepared if the play is a significant global stock, commodity rally. I’ve got my share of gold stocks but in being short Materials and only holding CCJ in the commodity patch, there would be a lot of work to do to retool the portfolio in line with the speculative anti-USD trade we introduced this week.

That is just fine! There would be plenty of time to adjust and of course I want to evaluate the situation closely. Uncle Buck could tank tomorrow or rocket on Tuesday. But our job is to understand the macro and deploy in accordance with it. So this week there is a potential new theme for H2, 2023 that could obsolete the old theme. But why don’t we just tap the breaks, realize we are in a good spot right now and follow the indications? That is what I will do.

Cash is 81% and if the current macro view holds it could be increased. If the new potential macro view comes about it would be reduced in line with that speculation.

Cash & income-paying Equivalents are at levels that are right for me and my real-world situation. Your situation is different. Cash will be adjusted as needed.

Refer to the Trade Log under the NFTRH Premium menu at nftrh.com for trade info, if interested (not that you necessarily should be). Also, you can follow at Twitter @NFTRHgt for notice of updates.

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Notes From the Rabbit Hole (NFTRH) is a weekly market report in which we provide analysis on financial markets.  We make every effort to provide accurate and high quality content, but this analysis ultimately represents our opinions and these opinions are provided without warranty or guarantee of any kind.  See full terms & conditions of service under the ‘About’ heading in the main menu.