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Summary

US Stock Market: Long and intermediate trends up, short-term trend down. Seasonal bottoms now on average. Sentiment is a tailwind and degrading risk indicators a headwind. Leaning bullish into year end, but aware that cash is a great risk manager that is paying income.

US Market Sentiment (as per last week): 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). NEW: So sentiment-wise, the view is short-term bullish and big picture bearish (considering the bull killer already in the books).

Indicators: Market breadth is an ongoing concern as equal weight SPX is tanking vs. headline SPX. Yield curve and Gold/Silver ratio, two stress indicators, are easing a bit from recent spikes. If they resume upward the indication is risk off. High Yield Spreads are also easing just a bit after elevating the week before. Libor/T-Bill yields are calm. All in all, a high risk macro with timing the issue.

Fiscal Inflation View: We are a little more than a year out from the US presidential election. This gives me pause from the bearish, counter-cyclical side that is favored for 2024. That is because I believe that politicians will stop at nothing to inflate the public’s perception of them at such times. It’s a matter of when will the markets rebel against the debt spending that these political robots think they can go to the well for into eternity. For now, I am going to side with the market. I think it can overwhelm the fiscal debt spenders prior to the next inflation problem.

Global Stock Markets: Not bullish on balance, and subject to the US dollar.

Precious Metals: Negative fundamental indicators aided by war. Not ideal. However, crude oil price also aided by war and gold is in a fledgling breakout vs. crude oil. If that is real then the funda will continue to improve. As for gold mining, the Q3 reporting period upcoming saw gold declining in oil terms, a fundamental negative for the earnings reports upcoming. Either the sector will discount improved forward funda and continue to rally or there could be a final plunge. See segment for the bull and bear cases for the miners and both metals as well. Longer-term, a significant bull market leg is expected amid positive real gold mining fundamentals.

Commodities: Last week: “CRB (305) and crude oil (105) targets at least temporarily shelved.” At the instigation of middle east war the targets for oil and the index it drives, are back on. Gas is seasonally positive, Uranium is taking a rotation out and a buying opportunity could come before long as outlined for URNM in the Commodities segment. Copper and industrial metals along with Ags are bearish. See segment.

Currencies: USD took out the March high, dropped back below it and popped back above it. If the Gold/Silver ratio (GSR) holds last week’s low and turns back up there may yet be more market pain to come in Q4. That would be in defiance of the sentiment and seasonal views, which are biased positive. Hence, the default is for we Americans, at least, to hold interest-bearing USD until the situation clears. USD is currently poised to inflict a liquidity problem on the markets if the GSR also rises. If it happens, it could disproportionately affect the inflation trades, EM/Asia and non-Tech US sectors.

Freer Form This Week – Macro & Precious Metals

Once in a while I like to depart from the more structured format and just start writing without much concern for discrete and ordered segments. This is one of those occasions, as I’d like to get right down to what’s on my mind, what feels most important.

To begin with, the gold stock sector is a primary target for the new macro. There will be other targets as well (long and short), but for now we’d look for gold stocks to lead the way. That is our big picture operating plan. The plan, which has been anticipated to unfold gradually over time, and then suddenly, involves:

• A top in Treasury bond yields and then a precipitous decline as the Goldilocks ‘false dawn’ rally in risk assets tops out as well. This would be the coming of a market liquidity problem after Goldi’s pleasant disinflationary signaling. It is possible – but far from confirmed – that yields may have already topped. If so it would then be a process of having it eventually dawn on the herd that inflation has fallen too far.
• We have, after all, already seen deflationary pressure in many commodities, commodity producers and resource rich global regions. But as yet that is under the umbrella of Goldilocks (disinflation).
• This pressure would drive yield curves upward to steepening as short-term yields tank (nominally and in relation to long-term yields) in a flight to the safety of cash and short-term equivalents.
• However, despite obvious cracks in the economy from manufacturing data to real estate, the Good Ship Lollipop is still sailing the calm seas of its vast services sectors. Governmental actions (fiscal stimulus/inflation policies) are also fighting our counter-cyclical view. For now. Patience. With a presidential election a little over a year from now we can bet that government will be in there doing its level best to interfere with and manipulate the markets by any means possible.
• Meanwhile, we look for more macro indications to degrade and eventually put a critical mass of pressure on the markets to crack them into the next bear market. Again, patience (lots of it). In recent weeks/months we have had a firm USD and a constructive Gold/Silver ratio playing to the script. Just lately High Yield Spreads began to perk up, indicating but far from confirming a brewing risk ‘off’ sentiment. Libor/T-bill yields are still calm. The stock market is sporting some seriously negative breadth divergences.
• When the yield tops out and the inflation trades are cooked to the degree that even the public realizes it, the new macro would have its day.
• Later, new inflationary phases could be ever more painful with the bond market already in rebellion mode.

Reference yesterday’s public article for more on this complex situation. But in essence, it’s a counterintuitive viewpoint because the decades long downtrend in long-term yields was counterintuitive to the inflationary operations (monetary & fiscal) of the last 20 years. To review, bonds were giving disinflationary signaling (long-term trend) that allowed for inflationary policy (which tended to drive the yield to peaks all along the Continuum of disinflationary signaling).

You could say that inflation – and the chronic under-performance of the gold mining industry to its product, gold – was the product of disinflationary macro signals. What I am looking for out ahead is for deflationary pressure to be the product of the obviously broken Continuum and its inflationary signaling. Please read that again, if/as needed. I am not trying to confuse. I am trying to get the macro right.

Disinflationary bond market signaling led to 20 years of inflationary operations. It is (IMO) reasonable to expect that the currently alarming inflationary signal could lead to an interim deflation scare, at least, if not actual deflation.

Hence, it was noted in the article linked above that the spike shown on this chart could be considered a handle of sorts to the new macro. Few are expecting a precipitous decline in what they call “inflation”. *

* What we have had post-2020 is not actually inflation. It is lingering inflationary EFFECTS, as the inflation was long-since concluded on the monetary side (Fed) and is now solely in the hands of the fiscal authorities in government. They are fighting our counter-cyclical view tooth and nail with debt spending.

If the yield tanks I don’t expect it to negate its breakout in the new inflationary macro. But I expect the… let’s call it adjustment… to be alarming toward a deflationary view. If we were to simplify the big picture we might say that a pullback in the 30yr to 3% from the current 4.8% could feel deflationary. A deflation scare, perhaps.

It would be in that pullback that the gold mining sector, in correction since mid-2020, could finally get unleashed with actual positive fundamentals as gold assumes leadership over commodities and stocks. That is the bigger macro view, at least the favored view. On the smaller picture, let’s remember the positive and negative in the form of Friday’s Trade Log notes:

A side note to the above is that GDX has actually followed one of its primary fundamentals as it corrected while the Gold/Oil ratio declined in tandem. Let those touting crude oil as a reason to buy gold and gold miners tout on. Let’s just be right without concern about painting reasons to be bullish into the picture. I find the correlation of the two charts above (and Gold/CRB ratio as well) to be reassuring because in the old macro it was not often the case that the miners tracked their proper fundamentals so well.

Personally, I would like to see a near ‘can’t miss’ situation where the bugs take one final slaughter due to the implications of the Gold/Oil ratio’s influence on Q3 earnings reports upcoming. Further, I would like to see Gold/Oil continue the little breakout it made after Q3 completed. Imagine that; most bugs selling because oil and other commodities and markets are tanking due to deflation as the fundamentals improve by leaps and bounds. That is the purest investment case possible. It is elusive, but it could well be setting up.

However, in contrast to my ‘hoped for’ scenario in the paragraph above, the miners have been reliably tracking the fundamental, and if gold really is resuming upward vs. oil GDX may well already have bottomed. A lot of balls in the air, folks. But patience will win out as the answers come in.

Returning to the daily candlestick chart of GDX, it bounced on volume to the top of the wedge. If it breaks the wedge the next important areas are resistance at 30, the SMA 200 at 30.55 and then the neckline above 31. Meanwhile, GDX resides in its downtrend from the May double top.

In addition to the still compromised fundamentals, here is a grizzly view of the headlines at one gold website. Unlike some other gold websites, 321gold curates its content in line with its owner’s viewpoints. Nothing wrong with that on the face of it, as long as the owner’s viewpoints are rational. In this case the war drums are beating, the world is ending and the beat goes on. This is not a healthy indication for gold or the miners, on balance.

Hoye is fine as he is on his forever post-bubble contraction theme (squirrel to find nut, possibly in 2024). When PTJ speaks, I tend to listen, if not always agree. Dalio is fine, a good thinker if an occasional contrary indicator. Much of the rest of it can be tuned out (at least by me). The most irrepressible gold, gold stock and inflation tout is not even included. He’ll probably show up next week with a lot of ‘war this, oil that, inflation the other thing’ with a side order of the usual India & China love trade stuff in the next installment.

If you read on me that I want a final plunge amid rapidly improving fundamentals and debunking of the usual perma-suspects, you read correctly. I am human. Some would say “all too”.

But stepping away from my own emotion and bias, I will go by the charts primarily, and the fundamentals secondarily. That is because the funda could easily follow the technicals. Or as per the trends in Gold/Oil and GDX shown above, they could go together.

Today we have the precious metals bounce occurring within a downtrend from the spring, amid inflammatory war headlines. Not ideal. Not yet. But going just by the ratio chart and tuning out the war drums, we do have a picture of improvement last week. At face value, and in the face of war, gold is flashing the beginnings of counter-cyclical signaling in ratio to risk assets. I want to be prepared for this to be a typical false signal amid hype fundamentals (war), but not necessarily make that assumption because of how long the larger PM correction has already been in play (August, 2020).

Back on the miners, HUI’s weekly chart shows a bounce to clear resistance. It also shows an intact downtrend since May 2022 and a larger one from the post-pandemic high of August, 2020.

Gold Miners Bottom Line

A seasonal low either happened on October 4th or it is upcoming. The technicals will guide and currently the TA says “downtrends intact”. The fundamentals twitched favorable but that has war drums behind it. Follow through is needed. Complicating matters, the Q3 reporting season is upcoming and the Gold/Oil ratio declined all through that period. Theoretically at least, it’s a negative (although the market could cast aside its usual trend following character and look ahead for once). Ahead I see the potential for real low that comes amid a real turn in the funda.

Gold (daily) smashed upward to the next resistance area that includes the 50 and 200 day moving averages. Obviously, follow through is needed here as well.

Silver (daily) took out the first clear resistance level as we thought it may do. But here too are the moving averages. Get on your horse Silver (oh wait…) and follow through if you want to go bullish. On a positive note, silver has already touched the preferred support level below 21 just as gold smacked the lower bound of the ‘must hold’ level. Hence, I’d keep an open mind about bullish possibilities, despite not because of, the war drums.

US Stock Market

While Semiconductor leadership is wobbling again, it has not broken down. Tech leadership is fine and dandy. Along with that, Growth is still outpacing Value. This is not bearish market signaling. It’s no coincidence that I hold a few Tech stocks and tried a corresponding short on SPX, however temporarily.

Speaking of SPX, the chart asks “why?” with respect to that short. And if war drums played a part in the end of week pullback, that is actually a contrary bullish sentiment input. For a more bullish view of SPX I’d have preferred a harder smack into support below the SMA 200. We shall see. The short-term trend is down but the intermediate and long-term trends are still firmly up.

US Market Sentiment

US Market Sentiment is favoring contrary bullish, but allowing for either case, bullish or bearish in the short-term. However, a potential bull killer reading was already logged in July. That could come into play to indicate a real top when the rally ends, with no need for such an extreme to be registered again.

From a seasonal standpoint the stock market is due to bottom and rally.

If the seasonal plays out the middling sentiment profile will resolve bullish in line with the average. If not, we’ll have an exception to the average. But with war and increasing global angst in the headlines, I am not in love the stock market bear case, just as I am not yet in love with the gold bull case for the same reason.

I am not predicting anything, but let’s note a classic setup that could conceivably play out. See those headlines at 321gold above? The classic outcome is that they get clowned yet again and the stock market, which one headline claims are “on the edge of the end of the world”, rallies.

The usual suspects are aligned with Dumb Money above, biased toward contrary bullish.

• NAAIM (Investment Managers): Continued to be bearish and contrary positive on 10/11. Bumping up their bullishness, but only to 46% compared to 101% in July.
• Investors Intelligence (Newsletters): Also bounced a bit (10/10) but are still well off the summer highs above 3, at a current 2.1 bull/bear ratio.
• AAII (Ma & Pa): Bull/Bear bounced like the others, to 1.1, but still down hard from nearly 2.5 in the summer.

Bottom Line

Sentiment favors the bullish view on the short-term and a bearish one, longer-term (if the bull killer reading holds true). With the seasonal turning positive, we can favor a contrary bullish view, perhaps into year end. However, this will require mentally dealing with all the late stage indicators currently in play. So our own personal sentiment/psych profiles come into play as well.

A rational strategy is to default to interest paying cash/equivalents and gauge the markets each week. For me that will mean NO INVESTMENT, but probably a good bit of swing trading until/unless the market breaks into a bear sooner rather than later. Then I’d like to ride a couple indexes short.

Global View

The World (ex-US) is more suspect on the current bear trap breakdown and upward reversal than it was on the previous, because in March it made a healthy test of the daily SMA 200. Today it’s happening beneath that marker. The best we can say for the world on balance is “not bullish”.

The weekly view shows a hold right where it should have held, at the clear support defined by the 2018 and 2020 highs. It also shows two moving averages (EMA 15 & 50) that have served to indicate bull and bear phases (green & red arrows) when they trigger. As you can see the green EMA 15 is declining toward the EMA 50, but has not yet crossed. Barring a strong and immediate rally, that appears imminent. Meanwhile, support is support until such time as it no longer is.

US Dollar, Gold/Silver Ratio & Yield Curve

As usual, global markets (along with commodities and many US sectors) will depend on the prospects of the US dollar. USD (daily) has one main fundamental underpinning, hawkish US monetary policy. As that gets relieved and as the government continues to try to debt-spend, the only remaining funda would be a global liquidity event, which would drive refuge seekers into the reserve currency. Boy, that “dedollarization” hype campaign seems so long ago. Yet it was only in July, when USD bear trapped and said “enough!”

While MACD appears to be rolling, the main feature here is that the price dinged a higher high to March, pulled back below it and, typical of today’s markets and their skittish/jumpy/volatile signaling, took it back. Overbought has been relieved to a degree and USD will look to its fellow would-be liquidity destroyer, the Gold/Silver ratio (GSR) for indications.

The daily chart shows a recent break upward. We noted that this and fellow market/economic stress indicator the 10-2yr yield curve had spiked but could be due for a cool down. The GSR cooled down.

The yield curve cooled down a bit. But each had made an initial move upward. If this resumes, a liquidity event could be in the making. But… patience with the process.

Commodities

• Crude Oil is getting the war bid. Backing out the noise, the target is 105 as it held the higher low to August. I’ll hang on to USO.
• Uranium is getting rotated as the hedge hogs look to other pastures, like traditional energy (oil & gas). Despite this, I still hold UUUU for now. Watching URNM (current: 43.31) for a potential sector buy in the 35-38 range.
• Gas is pulling back after its base breakout, which is normal. I’ll hang on to AR.
• On the back of oil the CRB index rammed back above its SMA 50 and ticked above its base breakout point. I suppose the 305 target is once again active.
• Copper and the industrial metals are not good, as China/Asia continue to be weak and so is the story copper bulls have finally stopped touting lately. Funny how a correction or bear market will do that. It’s similar to the crickets you hear in the “dedollarization” camp these days.
• Palladium and Platinum are bearish but Pd (current: 1145) is approaching long-term support (800 to 900 range), down from a high above 3400. Pt (current: 884) is at support right here. Next clear support is around 650. No current interest in the PGMs, but the next cyclical inflation phase would be a different matter, if applicable.
• The Ag index, GKX (current: 397) is also bearish and appears not to have clear support until 310 or so.

So what have we here? We have exactly what we’d expected as the disinflationary Goldilocks play unfolded. Commodities have not been the place to be aside from the hedge hogs rotating, the fairy stories promoted and special situations like Oil (subject to OPEC manip and middle east war inputs) and Uranium (structurally sound long-term fundamentals). Gas is the oddball, as it often tends to go its own way. Currently it is in base breakout mode from very long-term support with a positive seasonal (on average) into November.

Portfolios

Savings balanced by gold

Trading Account: Short XME (metals & miners)

Roth IRA (non-taxable, no contributions)

Cash is 88% and as the red note indicates, it may get higher if I reverse course on shorting. A caveat and disclaimer about the Trade Log is that I am not as educated during the week (especially late in the week) as I am after I finish writing a report for any given week. I learn as I write NFTRH reports, and what I learned writing this one is that I think I am bullish in the short-term and still bearish after that (unless conditions like poor breadth, steepening yield curves, possibly rising Gold/Silver ratio, etc. are no longer trustworthy; but I strongly believe they are trustworthy).

So I could envision the short being covered and getting longer individual stocks for a seasonal phase. But the cash position around 90% (+/-) remains the default position as it pays me to not take on much risk.

Gold miners are the initial preferred big picture target, but in the here and now Tech and Growth are still leading the S&P 500, which is a collection of those two and several other sectors.

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.