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Summary

US Stock Market: SPX filled its downside gap and bounced from just above the 200 day average. Not bad. But it bounced to S/T resistance. It’ll either keep going, fill an upside gap and fail again, or keep going and finish the still-intact bull rally, or drop for a deeper test of support. Regardless, the technicals are far from bear market indications and the beaten but not broken SOX>NDX>SPX leadership chain is intact.

US Market Sentiment: Sentiment favors a short-term contrary bullish view. But importantly, this summer it also registered “bull killer” readings (more than equal and opposite to the big contrary positive sentiment we noted back in Q4, 2022)

Indicators: Market breadth is bad and a bearish signal. Libor/T-bill yields are still sleeping soundly, but High Yield spreads have continued to perk up; a warning about risk tolerance beneath the surface. The Gold/Silver ratio, USD and yield curve all flashed warnings before the GSR and USD eased late last week. The YC did not ease. The picture is of high risk, regardless of any sleeping indicators. When the time comes they’ll be rudely awakened.

Fiscal Inflation View: With the Fed on the other side of the inflation machine, it’s up to government. I don’t put anything past these political entities to do whatever damaging things they need to in order to secure the next election. That means stimulation by (fiscal) inflation. However, the favored view is still for an interim liquidity crisis. Treasury yields are nose-bleeding and can pull back at any time. A sharp decline in bond yields could at first see Goldilocks thrive and then morph to a deflation scare. Not yet favoring a new inflation phase until after a liquidity event. Inflation is possibly far out in 2024 or even 2025.

Global Stock Markets: All global eyes on the not yet “dedollarized” USD and its decision point on its extended rally (as usual). Segment has more details and includes USD chart and discussion.

Precious Metals: Fundamentals still negative as noted last week. There is much to like and some things to remain cautious about, as this week’s segment goes into a lot of detail. The view is quite bullish from a risk/reward standpoint and gold and silver tested support targets and bounced as anticipated on what would have been a negative data day. Contrarians to attention. The miners tapped the GDX falling wedge for what could be the final time if pattern theory plays out. But this could also be a bounce prior to a real bottom. Beyond that on the big picture, we continue to look at the gold stock sector as one that may benefit greatly in the new macro.

Commodities: CRB (305) and crude oil (105) targets at least temporarily shelved. Commodities have not been the place to be as Copper hype has failed, Lithium hype has failed, PGM have failed, Ags have failed. Gas did break upward from the base we’ve been tracking and is seasonally positive (AR is my vehicle). Uranium is an outlier that is either getting played by the hedge hogs or is seeking out discrete supply/demand fundamentals. Aware of the former but also respectful of the latter, I’ve taken on UUUU and NXE on the pullbacks.

Currencies (per last 2 weeks): USD broke above the March high, technically resetting the daily chart uptrend, rejoining the intact longer-term charts. If it’s a bull trap and the Gold/Silver ratio remains under control, the macro can party sooner. If USD goes up from here and the GSR joins, consider getting out of the pool, collecting the income that the Fed is providing and await potentially rewarding forward opportunities. NEW: GSR broke out and hurt the macro, but on Friday’s relief it pulled back hard and USD eased. Watch silver’s relationship to gold. If it bulls and leads it’ll probably come with a USD decline. If gold resumes leadership risk probably goes further ‘off’. Either way, USD has set a daily uptrend, which could resume after a pullback. As noted often, it is also still in a bull market from 2008. The main ‘fundamental’, to the disappointment of the dedollarization herd, would be a market liquidity crisis of some kind.

Still on Plan

The bounce was anticipated. But SPX barely missed the top of the support zone, the SMA 200 (4208). It would have been preferable and possibly more bullish had it dropped hard into a support test. Regardless, SPX bounced from just above the SMA 200 right into short-term resistance. Answers about whether it breaks through to fill the September down gap, continues upward from there or finds resistance for a deeper correction, all upcoming. Of note, SPX did drop far enough to fill the June up gap. That is a positive, having that little feller out of there.

The internal leadership chart still shows the Semi > Tech > Broad trends in effect. It’s likely not a bear market signal until these give way. NDX/SPX is bullish and the other two are thus far holding higher lows.

However, the ratio of defensive Healthcare to offensive broad (XLV/SPY, monthly) continues to offer a big picture warning that the bull is well into the back 9, if not on the 17th or 18th hole.

Dialing in a daily chart view, you can see that there is no conclusive low, but a small base with a potential for one.

Other Indicators

• Libor/T-bill yields still completely sedate and supportive of risk ‘on’.
• Real Yields (5 & 10yr) are extremely elevated, implying super tight monetary conditions. Thus far it does not matter much to US markets and the economy. Interestingly, gold, which should be in Palookaville on such extended real yields, hung tough at support (as anticipated in Friday’s Trade Log entry) and could be flashing a negative divergence to tight monetary conditions. Put another way, pressure could be building for a coming negative liquidity event.
• High Yield (junk bond) Spreads are still elevating and giving a warning about increasing risk ‘off’ behavior.
• 10yr-2yr Yield Curve has ticked a higher high on the steepening that began as expected, after the secondary inversion into July.
• Gold/Silver ratio (chart appears in the Precious Metals segment) made a move that may one day prove to have been the first move of the new and challenging macro. But the ratio pulled back hard on Friday, which we also anticipated in the Trade Log per Thursday’s entry. Unlike the GSR, the YC did not ease on Friday. But markets don’t prove out logical relationships on a daily basis. They usually do so over longer trends.

Bottom Line to the Above

Good Ship Lollipop sails along. Risk is high, a bounce was anticipated and it could be mini, or if that turns out to be THE hard test of support, a stronger, perhaps seasonal, rally can come of this bounce. However, on the big macro picture risk is at nosebleed high levels. Hence, vigilance and risk management are recommended from here on insofar as you’d activate bullish (or bearish, in the near-term). SPX can bounce to fill the gap or test the SMA 50, which it would need to take out to really bring the ‘rally resumption’ view forward. Short of that, a deeper correction is still possible. But the trends are up and the correction thus far has been counter that trend.

In other words, the headline US indexes are still bullish until they lose critical support and their uptrends. The 3808 marker on the daily chart above would be the “critical” bear market point. That’s a long way from current levels.

US Market Sentiment

Smart & Dumb money indicators have traveled a good distance to a contrary positive situation. Again, it’s not extreme. But it is enough to support a bounce or even bull rally resumption if that is what is in play. The July contrary bearish extreme was, however, a warning that the bull may have already topped. Those extremes (red) were of even a greater degree than the contrary bullish extremes of Q4, 2022 (green). If we anticipated a potentially strong bull phase at the green arrows, should we not anticipate a potentially strong bear phase moving forward?

• Investors Intelligence (Newsletters): Bull/Bear ratio down to 1.77 (10/3) from the summer high above 3. So it’s been nearly cut in half. Again, not extreme by any means, but a jump in bearish sentiment, which could work contrary bullish in the near-term.
• AAII (Ma & Pa): Bull/Bear ratio of .7 (10/4) from a reading of 2.5 in July. In other words, bear sentiment greatly outpacing bull sentiment. This is contrary bullish.
• NAAIM (Investment Managers): NAAIM remained in full retreat (10/4) from a high over 100% (slightly leveraged bullish) to the current 36%. Much like II, this is supportive of a continued market bounce/rally.

Market Sentiment Bottom Line

The extremes registered in the summer may have been a bull killer (regardless of whether the short-term correction ends and the rally resumes). Our goal has been SPX 4800 to a possible test of the all-time highs. But the view is and has been that the bull is for all intents and purposes, over (pending this potential double top). Market sentiment is in agreement with that. Potential for nearer-term rally and for a bigger picture top and oncoming bear market.

As seasonals take effect, it is conceivable that stocks can party into year end. But if the current correction gives way to new upside we’ll be on watch for the next top to be the top.

Currencies & Global Stock Markets (daily charts)

USD sold the news on Friday, but remains in the uptrend from the July bear trap breakdown. We don’t need to go into more detail on why the world is ‘anti’ USD. We’ve reviewed that stuff consistently. From the March highs to the July lows to the current high global (and most US segments) have been ‘anti’ the buck.

So it is important to get a read on what’s next for Uncle Buck. The trend from July is still completely intact. But the issue for USD is that it pinged a breakout and put in a trend change marker while becoming very overbought. A viable interpretation is that USD could pull back harder from here, allowing for global asset rallies to resume. But if USD pulls back to support levels noted, roughly corresponding with the SMA 50 (104) and the SMA 200 (103) we should raise caution levels. Assuming and overbought pullback in USD, the favored play would be…

• USD pulls back to around 103, and broad markets rally.
• USD grinds out support – potentially over a period of weeks – raising the caution level.
• USD grabs his pal, the Gold/Silver ratio and the two of them, along with perhaps a newly steepening yield curve, proceed to wreck the macro as disinflation and Goldilocks morph to a deflation scare (interim to the next inflation phase).
• It’s a plan, at least. This could take the remainder of 2023, at least, to play out to a market liquidity event.

Global currencies going their ‘anti’ USD way, possibly prepping a bounce if Uncle Buck falters in its post-July trend.

Please take due note that local currencies play a role in market performance for global citizens. NFTRH being American, cannot get too far afield managing all those moving parts with my simple charts. So global market comments and charts are for reference.

The World (ex-US) said “hmmm, we like!” as the US dollar sold the (payrolls) news on Friday. Obviously, where USD is still on an intermediate uptrend, ACWX, Europe, Canada and Australia remain biased down, at best. The UK is still biased that way as well.

Japanese Nikkei is nearly to the point I’d consider taking interest. The area of the SMA 200 roughly coincides with a long-term chart’s pullback objective. Meanwhile, is that a little bear flag forming? If so, it could do the trick of banging the SMA 200.

Hong Kong, China, Asia, EM, etc. continue to trend down. If USD gets dropped further these will probably pop. But it would be a trade, not an investment. Fellow BRIC India is still bullish. But generally speaking there are promotions out there about BRICS, Dedollarization and the end of the USA, while somehow these human and commodity resource rich markets will prosper.

Promotions. Any dire market situation would very likely be global and it would revolve around the reserve currency, which is as yet far from dethroned. I would not be caught dreaming of a fantastic world where the great Leviathan is slain and yet the innocent underlings it subjugates live happily ever after.

Canada’s TSX-V is a disaster. Until it stops being a disaster I would favor more established equities in the commodity/resources patch. In other words, insofar as you’d want to buy ‘anti-USD’ items, why would you buy some hole in the ground with the word “Copper” in its name when you can buy real companies that are getting corrected hard (e.g. FCX and others)? That’s just an example to make a point. Copper miners do not look good right now.

Brazil’s Bovespa is at a buy point if you’re a Brazil bull. It finally tapped the SMA 200. If that holds I suppose it can take a good rally, assuming the wider EM/commodity/resources areas do. Argentina de-bubbled itself, as least on daily chart appearances (long-term sure do look bubbly) by successfully testing the SMA 50.

Mexico… aye aye aye that is bearish. Probably due for a bounce. Africa robo-down and FM firmly trending down since July.

Precious Metals

Let’s keep the fundamental pom poms in the locker, shall we? Let’s at least not waive them until given reason. While the macro is likely in a process of pivoting, it has not yet pivoted. A process is a grind and it requires patience and perspective.

These macro fundamental indications have not yet turned in gold’s favor and thus, to a leveraged degree, have not yet turned in gold miners’ favor. Again, don’t let promos from inflationistas fool you. There was a bounce in Gold/Oil within its downtrend, but Gold/Stocks completely erased the good that had been done in the second half of September. The bottom line is that while the precious metals and in particular, PM miners, can rally with everything else, they are not (yet) unique, and thus not touted in these pages as anything better than your average Semiconductor/Tech stock or commodity producer.

I do, however, like the big picture setup of what I think is an expiring risk ‘on’ bubble with a new macro out ahead that may have the potential to kick the gold sector’s positive risk/reward into gear as a future new long-term trend.

Speaking of big pictures, here is the log scale monthly chart view of gold tapping a long-term trend line. I don’t often use log charts, but one supposed utility in using them is to view long-term trend lines as it smooths out trends in percentage terms. Last week gold touched a viable point on the big picture just as it did on the daily picture (ref. Friday Trade Log).

Switching to a monthly linear view we see that gold could drop below 1800 to find more support. But I don’t think that is likely, at least not until after a bounce, at least.

Interlude: Pom poms still in the locker, I want to convey another possible (but IMO not probable) interpretation of the big picture gold price. Our measured target off the giant Cup pattern is 3000+. The messy Handle has taken 3 stabs at blue sky and failed each. The classic interpretation is that the more times resistance is tested the weaker it becomes. Great, that’s in line with current big picture analysis.

But playing devil’s advocate, what if gold is prepping to fail or at least not break out any time soon, and lead the broad macro into an Armageddon-like liquidation situation. Dedollarizers would be slaughtered and if even gold declines there would be nowhere to hide. Let’s just always be open minded and deprogrammed, okay?

By the way, the gold miners could still flourish in that scenario because in the case outlined above, if gold were to drop or stay perma-flat, it would skyrocket upward in terms of broad cyclical markets and assets, including those that drive mining costs. In other words, leverage would come into play for the miners and it would be positive. For a big picture view of the HUI/Gold ratio, see Friday’s public article, which included the HUI/Gold ratio and 30yr yield. On that chart the spiked 30yr yield seems to be begging the HUI/Gold ratio to get in gear. No easy analysis here, folks. It’s not what we do. Ongoing perspective and open mindedness is what we do.

Gold (daily) became quite oversold and bounced on a supposedly gold-negative data day right from our “must hold” level at a higher low to February. But please note that gold could – pending said bounce/rally to relieve sentiment – eventually drop into the next support zone which, on the daily chart is below 1800 and in alignment with the monthly above.

If as the bounce/rally kicks in, you can see the upcoming resistance levels. Take them out and you’re on your way, Mr. Yellow (okay, technically Mr. Blond). Don’t and you’re vulnerable to one more dunk. That would ding the long-term trendline on the log chart above, similar to that happened in Q4, 2022.

Silver’s daily chart situation shows a drop right to the downside target, which was to make a higher low to March and test the shaded bottoming cluster from 2022. So as has often been the case lately, let’s keep a close watch on silver for its leadership characteristics.

The Gold/Silver ratio broke upward from the consolidation, implying stress on the precious metals and the macro. This all came about. But now as USD got dinged ever so slightly the GSR pulled back hard on Friday’s relief. A failure by this ratio would imply a longer ‘anti USD’ rally potential. A test of the moving averages, a hold and renewed upside would start the clock ticking on the end of real market liquidity (and could signal a final phase of correction by the PM complex. So let’s take much interest to see if gold really has reasserted leadership over silver or if maybe that was a GSR bull trap prior to silver reasserting bullish.

We had a video review of the GDX daily chart situation on Friday. One point I neglected to make is that the classic interpretation of a wedge (GDX is in a would-be bullish falling wedge) is that it needs at least 5 touch points to be valid. Insert here my usual disclaimers about chart patterns. But it’s a point worth making. This chart shows 6 touch points, and for good measure I’ve added 5 waves down, which – correct me if I’m wrong – an EW chartist might find interesting and technically a sign of a completed wedge (correction).

Let’s wrap up with the weekly chart of HUI once again. There is a weekly hammer candle, which could spur a continued bounce. There is also an abundance of resistance beginning in the 220s. If gold were going to explore sub-1800 and silver were to fail at support just below 21 HUI could eventually test the 173 low from a year ago. I am speaking as a TA. As a fundamentalist we’ll revise if/as needed. But as noted above, the funda are still not good currently.

Finally, here too you can see 5 waves down from the May high, which may have already completed the correction. Sorry to be that guy, the guy stating this or that and providing no definitive answer. I do not guru guess or perma-promo my bias. I track situations constantly. Incoming information will fill in the blanks in convenient time frames.

Other Notes

• Bullish Percent (BPGDM) remains deeply oversold and contrary positive.
• Gold and Silver CoT data are not wildly compelling but are positive from a sentiment standpoint.
• Gold stocks have declined in relation to the broad SPX to test the lows of Q4, 2022. In my view it is an appropriate point for the ratios to bottom and before long, turn up.

Precious Metals Bottom Line

A bounce occurred as anticipated in Friday’s video update and Trade Log. It came with a good contrarian signal in that the economic data, as taken at face value, were not gold-positive. Evidently Fed fears actually receded by a combination of a potential ‘as good as it gets’ (for USD fundamentals) sentiment, and underlying payrolls data that showed muted upside pressure in wages.

The fundamentals have not turned, but we’ll expect them to turn when the broad bull flames out for real, including the headline indexes (as we’ve been noting, many sub-tiers of the broad markets have been flashing bearish breadth divergences). Meanwhile, if the PM complex continues to bounce with little fundamentals improvement it will likely do so as a not unique aspect of the wider macro. Hence, they could be vulnerable to the same future pressures as the broads.

At this moment I’ll have some exposure as long as I think the broad bounce will continue and as long as a bounce posture remains in play for the sector. But I’ll also have positions elsewhere because I like to have proof or at least confirmations, and right now there is little in the way of confirmation that the new macro is engaging just yet. The larger view for gold stocks of relative quality is a potential for an improbable bull market that many will miss the beginning of due to misconceptions about gold mining and inflation.

Commodities

Okay, I added crude oil fund USO to commodity related holdings in Uranium (NXE & UUUU) and Natural Gas (AR). Here is the CRB index having cracked the support of its base breakout, for the time being taking the upside target of 305 off the board. There is crude oil dropping to a thus far higher low. I added it if for no other reason than our heating system is oil fired and if the price rises again this will help. If it doesn’t I’ll elimintate USO and enjoy a less expensive winter.

NatGas is postured as if it finally listened to me when I noted that seasonally, it is due and technically it was basing. Industrial Metals (including copper) are still in bearish alignment. I don’t want any of this stuff until it at least postures to bounce. Even then, I’d want to get an indication of a substantial commodity rally, not a mere bounce. The Ags continue to be bearish as well.

Here is Natty from a long-term support view once again. Resistance upcoming.

The Uranium sector generally held the 50 day averages on a sharp pullback. I added a couple items based on spec of an anti-USD macro rather than a technical view that this pullback had done enough to eliminate the excess momentum. But I did not want to have no exposure in case it resumes upward. While it could resume correction, the sector, which often marches to its own drummer, has gone bullish on a longer view and could be a stand alone macro play. Hence, I try to give it the benefit of the doubt at certain junctures (like the recent pullback).

Finally, the riff raff chart that may one day hold lots of bargains, some of which are sporting falling wedges, including Talon Metals, which may have already broken one to the upside.

Pertaining to PGM producer SBSW (monthly), Palladium is getting closer to clear long-term support as plotted a few months ago. Much like a Gas bull would have bought long-term support, so too would a Pd bull take interest at this support, all other things being equal.

Commodities Bottom Line

“It remains a very mixed bag” he writes with an image of Hedge Hogs and machines roving the sector and causing the Commodity rotation the sector is famous for. It’s a game of Whack-A-Mole, after all. I give Uranium a chance to buck the bearishness due to its unique fundamentals and Gas a chance to continue to rally due to seasonals. But in general commodities were smacked bearish again and if there is to be a broad rally it is not yet technically indicated (continue to watch Silver/Gold, USD, etc.).

Portfolios

Savings balanced by gold

Trading Account: No positions

Roth IRA (non-taxable, no contributions)

Cash is still a highly elevated 88%. And why not (for my purposes, at least)? Cash income like this has not been available since Bernanke set his big brain toward enriching asset owners and impairing the poor and middle classes by inflating with abandon and killing the notion that saving was a prudent thing to do. My unvarnished opinion? He and his ilk are vile creatures.

Okay now, back to unbiased, even keeled newsletter writer. The Fed is paying US market participants to stay safe and sound right now as we evaluate the opportunities ahead. I feel more bullish than bearish in the short-term and more bearish than bullish longer-term (2024) as things stand. The big play continues to be a “new macro”, where under the right circumstances the gold mining industry could be revalued to the amazement of many, since it has been such a bad sector on balance for so long. That’s the thing about big picture macro trend changes. They change a trend while the trend-following herds continue with the old one.

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.