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Summary

• US Stock Market: While late stage rotations appear to be in play Semi & big Tech leadership held and remained intact. Bullish is bullish until it no longer is.
• US Market Sentiment (as per last week): Now on the doorstep of epic over-bullish as the we hear more and more “soft landing” crap in the media. This can persist indefinitely, but it is now a firm condition of a market top and possible gateway to a real bear market (unlike the 2022 false start).
• Indicators (as per last week): Stability/Instability indicators are still calm, while risk/reward indicators are sounding alarms. When risk is realized the story will change with great force. Like flipping a switch.
• Global Stock Markets: Generally bullish to varying degrees. Most interested in EM/Asia, which appear in similar charts patterns that Semi and US Tech were in back in January. In other words, they could get some late stage rotation.
• Precious Metals (as per last week): Still on the intermediate rally as long as the March lows hold. Yet still on a shorter-term rally as long as the late June/early July lows hold. Bigger picture it’s not yet the ultimate post-bubble, dis/de flationary environment for serious investment (in the miners; for me it’s always a good time to have some gold on hand as insurance and/or long-term value retention).
• Commodities (as per last week): Watch USD’s bounce to test its technical breakdown. If USD fails we’re targeting as high as CRB 305. If it’s a USD head fake and resumed bull the play ends.
• Currencies (as per last week): All about Uncle Buck, my friends. Short-term still bearish. Long-term it’s a firm bull market.

Email From a Subscriber and Response

Subscriber RD is a mutual fund manager trying to navigate these markets like the rest of us. I decided to shoe horn this into today’s report in the event you may be interested.

Wondering this morning if the persistent Goldilocks environment could be thought of as coiling or basing activity that could result in a violent break up or down (or up violently first then down violently in emergency response) in rates, once basing activity is over. Wondering because of the high gold silver targets out there from sources I respect (MSA most prominently but also Luke Gromen).

Just a thought that might inform this week’s piece; no need to respond directly.

RD

My response, for what it’s worth:

Hi R…..,

Already got this week’s report mostly written. I see Goldilocks as a temporary condition on the way to a deflationary situation. The question I have is will there be one more, possibly non-Goldilocks asset rally that comes from a rotation into the more anti-USD stuff. That could fit with a bear market rise in commodities along with long-term yields, as yield curves start to steepen. My view is that while a steepener could start out with inflationary signaling (nominal yields rising), it would eventually morph deflationary (nominal yields falling).

As for the “high gold and silver targets” you note, gold is the holder of long-term value and should it somehow benefit from some kind of sentiment event this monetary insurance asset (considering the debt backing USD and other currencies) could get a re-rating much higher. Silver, to me, is a distant second, and only because of its monetary reputation to go along with its plentiful supply and outsized industrial (cyclical) uses relative to gold. Generally, I find it mentally healthier not to be hoping for a consistent, static asset like gold to make a big move like various speculations do (which make big moves in both directions).

IMO, gold would probably be pressured if I am right about a deflationary episode. But it is reliably FIRST to sniff out weakening central banks and future dovish monetary policy. So it could have big price upside (my target is and has since 2019 been 3000+) well in advance of the next inflationary phase.

Whipsaw

I was prepared for a whipsaw and I still got whipsawed! Got to love FOMC week. Although the issue was not really the Fed, which did as expected. The issue was a GDP number that pleased the market. Why should the machines be factoring the debt leverage that underpins GDP yet? It’s apparently still party time.

So above we have growth and the growth came with a distinct Goldilocks flavor.

The Sticky Price Consumer Price Index (CPI) is calculated from a subset of goods and services included in the CPI that change price relatively infrequently. Because these goods and services change price relatively infrequently, they are thought to incorporate expectations about future inflation to a greater degree than prices that change on a more frequent basis.

St. Louis Fed

We have been beating a disinflationary drum since Q4, 2022. I think there is no more debate. The public is still inflation phobic, but the public is the ultimate laggard. Sticky prices are decelerating and too should broader inflation expectations in due time as Goldilocks eventually splits the scene.

But for now, all good! Happy days (and soft landings) are here again! But the June ISM report, complete with several disgusting views into US manufacturing, is in a firm deceleration mode and can be reviewed here. Meanwhile, July’s ISM will be out on August 1.

So we have ‘real’ (if you can ignore the untenable 123% debt leverage that is its underpinning) GDP being celebrated. We have declining inflation signals being celebrated. We have a cyclical leader, US manufacturing, going in the tank while the lagging but vast services sectors keep that disturbing smile on Hazel’s face.

On that note, we have still okay Payrolls on any given month (services bloated though it is every given month), but a chart shows a mild deceleration in payrolls. It’s lumpy but a the mild trend is down.

A positive product of this noisy week was, in my opinion, the work done to further our recent comps of today vs. 1987, begun on July 17 as an add-on to NFTRH 766. On Thursday this extended update dug deeper into the theme after I’d noted a financial media eyeball-harvest featuring Peter Schiff. I decided that whatever the media’s timing in highlighting Perma-Peter, the moral hazards are real. It is interesting that the Schiff article I was poking fun at actually followed right on the heels of our own 1987 comp work.

The 1987 comp is a narrative worth respecting and keeping front and center, if not overreacting to.

And reflecting the sum of last week’s noise we have the US dollar, which did as anticipated and still put the whipsaw to me. FOMC and all this economy/inflation noise. Yeah, sounds about right. Thursday was for me a bit of a whirlwind with rebalancing and cash raising. Ever plucky, I dusted myself off and got back to business on Friday.

The Anti-Market

Here is how USD ended the week. The lower bound of the clear initial resistance zone was taken out and the upper bound briefly got poked and then held as resistance. As it stands now, USD is still ‘bounce on’ within its bearish daily chart structure.

As long as the daily chart’s bounce is on we must respect the bullish possibilities (like the recent USD decline having been a bear trap) because the larger picture is a bull market. Indeed, the weekly chart more clearly asks us to consider whether that was a bear trap (false breakdown). USD is back above an important longer-term support marker. Remember how gold similarly plunged through support and bear trapped a reversal upward in Q4, 2022? Remember?

While we are at it, let’s again review the big picture monthly chart. Anyone calling this anything other than a fully intact bull market from 2008 is looking through a biased, ‘de-dollarized’ lens.

What Could Drive USD?

With the Fed late in its rate hike cycle the obvious play is USD-bearish. That could set free the inflationist commodity/resources/hard assets/precious metals (as led by silver) brigade for another kick at the can. Hence, our openness to a temporary anti-USD trade, featuring commodities, among other markets.

The not so obvious, and for a majority, less satisfying play is an asset market top, a drive by frightened casino patrons to knee jerk for liquidity (AKA the reserve currency) a big bid for USD accompanied by an impulsive rise in gold vs. silver. As you can see by this weekly chart, the Gold/Silver ratio (GSR) is still well contained. Hence, our as yet undetermined macro when considering the as yet undetermined state of USD’s short-term situation. But in my opinion, it’s still all about the USD and if the GSR stays in rough correlation with it the signals will be…

• USD and GSR remain weak/decline: The broad bubble can rotate to favor commodities, EM, Precious Metals, etc. Examples: CRB index target is 305. GDX target is 40. SPX target is 4800. DJIA target is 37770.
• USD and GSR start to rally together: Everybody out of the pool! Or short. Or simply hold cash and prepare to buy the gold mining sector for a strong trade or even possibly a longer investment after the damage.
• A third and viable option is that markets take a summer correction and then regather for a final drive upward after the summer. It would then be after THAT top we’d prepare for a bearish and potentially post-bubble environment.

The reminder for newer subscribers is that gold, with its more counter-cyclical, less inflation sensitive, better long-term store of value character would gain a RELATIVE bid to silver in a macro liquidity crisis. Even if nominal gold would not rise with USD, it’s ratios to silver and so many other cyclical, inflation-sensitive risk assets sure would in a deflationary environment.

Meanwhile, Wayne & Garth Party On

Folks, this is dangerous. It’s also bullish. Dumb money travels with the bull.

We don’t need the other sentiment indicator graphics this week. They are…

• Investors Intelligence: Excessively and dangerously over-bullish.
• AAII: Excessively and dangerously over-bullish.
• NAAIM: Now also excessively and dangerously over-bullish after having been merely aping the bullish stock market.

The above readings were before Thursday’s bearish hiccup. But the dumb money in Sentimentrader’s graphic is the latest reading.

US Stock Market

S&P 500: Up day on Friday after a big bearish engulfing candle on Thursday. SPX dinged 4600 with a target of 4800. Not a great risk (see sentiment) vs. potential reward (200 SPX points) in my opinion. In fact, it’s quite poor. Meanwhile, let’s see if that big engulfing candle might mean something with respect to a summer pullback or correction.

DJIA: Measured target of 37770. Rotation, perceived more defensive, late stage, blah blah blah.

Nasdaq 100: They cling to Nvidia and Apple as if they are defensive. As if they will continue to lead. These are great companies, but valuation is a thing, is it not? NDX is up against the resistance of its topping cluster of late 2021. I shorted QQQ, and on Friday had a bad mood for it (when looking at the trading account as opposed to the IRA, which was good). VERY HIGH RISK, in my opinion.

Semiconductor Index: Same general state as NDX.

The play for these leaders, as with the broad US market, is either acceleration upward into nosebleed risk and blowout into a bear market (see silver circa spring, 2011) or pullback to partially clear sentiment now and a top later in the year.

But with the SOX>NDX>SPX leadership chain still fully intact the US stock market is still bullish here and now. No other way to call it. But sentiment will eventually matter.

Global Stock Markets

Right now and insofar as the USD may resume its short-term correction my interest is in the more anti-USD flavor of Emerging Markets, including and especially Asia. This is simply going by the daily charts. For example, we noted individual stock BABA in a couple of video updates (daily and weekly charts). EM/Asia could be part of a late stage “rotation” situation, much like commodities and certain US sectors.

Using Asia (ex-Japan) as an example, the daily chart shows a Golden Cross (SMA 50 above the SMA 200) in January, the obligatory plunge to punish its believers, a several month consolidation, a hold of the moving averages and now finally a move in the direction the cross would signal. Again for newer subscribers, a harsh move in the opposite direction of “Golden” or “Death” crosses is not only possible, it is very likely before the implication of the cross can assert. That’s something that the media and a majority of TAs forget to advise when touting such crosses.

Anyway, AAXJ is free to rally now if the macro goes that way. The moving averages have held and are starting to turn up, RSI is green and not overbought. MACD is also pleasant. Finally, up volume has dwarfed down volume, although Friday’s volume was fairly mute.

The weekly chart shows me something I saw in many Semiconductor and Tech stocks back in January-February. The pattern has a near identical look to some of those items back then. Hence, if the broad rally is going to continue and if it is going to use late stage rotation as its inspiration Asia asks “why not me?”. Weekly RSI and MACD are positive, not in the same zip code as overbought and frankly, look coiled for higher levels so long as the broad macro does not slip its moorings (as we keep a watchful eye on USD/GSR) .

Other aspects of the global markets are largely as we left them. On balance, in rally mode with Japan bullish and flagging a consolidation, India in blue sky, Canada and Australia improving (and Canada’s TSX-V holding key long-term support), Europe still bullish but starting to under-perform (although the German DAX closed at a new all time high), UK under-performing, I assume under hawkish central bank fears, and Latin America still generally motoring along, as is Mexico. Frontiers are still rallying but Africa is not. Frontier ETF (FM) is heavily weighted to Vietnam, which has been bulling within Asia.

Precious Metals (daily charts)

Let’s skip the fundamentals, which have not changed. They are degraded at best. The rationale for a precious metals rally is the same as it is for commodities and other markets, anti-USD. This is a touted fundamental within the Bug-O-Sphere, but it is a crock if you’re looking for a real and extended bull market.

A sentiment note is that the Commitments of Traders situation is still marginal at best and certainly not a contrary positive. CoT is not necessarily a rally ender, but it’s not what you want to see for a firmly bullish feeling of risk/reward. It is weighted toward risk.

All of that said, we will stay with the technicals with that understanding of the macro situation. And the first technical indicator is not pleasant. The HUI/Gold ratio (daily) dropped on Friday when it had all the opportunity in the world to rise with stock markets positive along with gold and silver.

However, check out what nominal gold did on Friday. It broke upward through resistance and is above its 50 and 200 day moving averages to boot. It also turned both RSI and MACD green. Bullish is bullish, and that is what the gold price is as it stands now. That would be on all time frames, since we are operating on long-term bull market rules. Now, as to whether that’s a bull trap move upward or not, I don’t have the premium Predict-o-matic crystal ball that gurus have. So we’ll have to see what transpires. But again, bullish be bullish at this time.

Silver violated support with a big red candle and then bounced on Friday. Unfortunately, said bounce did not take back resistance. While RSI and MACD are still positive RSI ticked below its EMA 20 and MACD is starting to trigger down. All in all, suspect short-term look but still a bullish situation with respect to the intermediate rally from Q4, 2022.

GDX played to the script we had for it. FOMC week was noisy, and a down thump on big volume happened on Thursday to fill the upper gap, as anticipated. The rally from Q4, 2022 is intact and would be intact even with a drop to fill the long-watched Sub-28 gap, as long as it holds a higher low. Intermediate rally target is 40 to fill the April gap down.

RSI and MACD are not inspiring and as I noticed on several individual gold stocks on Friday, the bounce remained conspicuously below the SMA 50. Add that to the HUI/Gold ratio above and there is reason for some short-term caution.

All of that technical noise aside, if the gold miners do rally with the cyclical macro any such upside target would be a “sell” as the it stands now. In my hazy crystal ball I see a post sell low amid deflationary pressure as a big buying opportunity. But that post-bubble stuff is out on the horizon. Right now we’re managing a rally, and it’s a grinding one at that. Gold miners, in this macro, are nothing special.

Commodities

I have simplified Energy exposure, taking profits in NOG and AR, which have been sector out-performers of late, and increasing XLE. It’s fine for now. NatGas is continuing its labored base/bottom making and WTI oil has taken out the daily SMA 200.

Furthermore, driven in part by oil, CRB index is ticking a new high and has a rally target of 305. It drove upward through the April high, got overbought and is now flagging. Test on! Bull trap or drive to 305?

When I got USD whipsawed, I shook out of Rare Earths producer MP and took a solid profit (there for the taking, after all) in CCJ. Both are back on primary watch if anti-USD trades continue. But in the Uranium sector, I may spec with NXE, UUUU or add URNM/SRUUF to existing position in FUUFF (FUU.V), which still looks good, technically.

The Copper patch is poised bullish, which makes sense considering constructive China/Asia/EM markets. I have ARREF (ARG.TO) and might be open to adding another copper/industrial metals position. I noticed some interesting charts in RIO, TECK, BHP etc. Indeed, BHP’s chart, complete with last week’s decline, has my attention.

In the Lithium patch, I watched and watched and watched LTHM and ALB decline decline decline. Still watching and interested (in their ‘higher low’ declines), pending USD.

Neither Platinum nor Palladium especially, are of interest right now. Pt is sideways/neutral at best and Pd is still on its drive to support at lower levels. Current price: 1241, support range: 900 to 1100, although it is testing the 2001 top right now. Could such long-term support be valid? I suppose. Still, I have little interest as yet.

Finally, the Agricultural index (GKX) is still trending down while the ETF (DBA) is trending up. Strange and a product of weightings within the sector. Regardless, I decided not to chase MOS or NTR and will keep on watch for pullbacks before considering them.

Portfolios

Savings balanced by gold.

Trading Account: Short QQQ

Roth IRA (non-taxable, no contributions)

Cash is at 82%, reflecting my indecision about the short-term direction of the US dollar. If USD’s bearish daily chart wins out over the intact weekly and flat out bullish monthly charts, I’ll put more cash to work, likely in anti-USD items (which below and in my opinion, generally and to varying degrees include AAXJ, BABA, ARREF, FUUFF and the gold stocks held. That is why gold stocks are “nothing special” yet, in my opinion.

One path I see as very possible is a summer market correction, which could act as a sentiment reset and springboard to targets. But sentiment and price risk are so high I take every pullback seriously. I am not an investor in things I consider to be bubbles.

Just trying to scrape together some profits while waiting for that which NFTRH usually is most interested in… a macro turn (the last of which was in Q4, 2022). The next turn should be quite bearish. That is why I poked QQQ short. I expect to have to cover it, either at a loss or after a market pullback. But with the sentiment risk in play right now I also don’t rule out a real top coming sooner rather than later.

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.