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Summary

US Stock Market: Despite decent sentiment and a positive seasonal US market leadership is under stress, breadth is very poor and SPX remains in correction for a deeper test of clear support beginning at around 4150. Such a test would determine ‘seasonal party on or bear market on’.

US Market Sentiment (as per last week): Sentiment is middling and favoring contrary bullish on the short-term. But it’s nowhere near extreme. The extreme came last summer at a “bull killer” reading opposite to Q4, 2022.

Indicators: Market breadth is bad, as noted above. Yield curves are steepening, indicating oncoming stress. High Yield bond spreads are elevating, not yet alarming but bear watching. Libor/T-bill is very calm and not indicative of systemic stress in the banking system. Long-term yields are very elevated and our view is that when they top out and yield curves steepen, far from being a relief from inflation that would be hoped, it could signal the end of the Goldilocks phase and the beginning of a deflation scare.

Fiscal Inflation View: In my view, this comes later. Perhaps at the trigger of a deflation scare.

Global Stock Markets: Last week: Not bullish on balance, and subject to the US dollar. This week: It’s worse.

Precious Metals: War bid in the sector, but so too was a whopper of a war bid in back in 2001 when gold and gold stocks rose for a blessedly short 2 years with a rising Gold/Silver ratio and declining US dollar. If a positive correlation of the old macro was USD and the GSR going together, might we have a blip in that relationship once again here in a new macro? We might (de-dollarizers to your posts!). Meanwhile, Gold/Stock market ratios shot upward, Gold/Commodities are constructive and Gold/Copper is demanding “counter-cyclical”. Technically, the metals and miners are testing upside resistance as anticipated. Gold is by far favored over silver and it’s got a better contrarian CoT situation to boot. Let’s also continue to be aware that Q3 numbers, due to be reported shortly, came against a declining Gold/Coil ratio (product/cost commodity). Gold is now making positive strides vs. oil.

Commodities: No interest in this failing sector doing so because it is supposed to be weak during dinflationary items. Crude oil is rigged and getting a war bid. Gas has had a seasonal bid as anticipated. Uranium is its own positive situation on the big picture and the rest of this stuff, from copper to palladium, is bearish.

Currencies: USD is dwelling above the March high and thus is in breakout mode. It could be a bear trap to bookend the bull trap in July. But a breakout is a breakout as long as it holds. USD has been tracking renewed hawkishness from the Fed. If the macro flips over and starts to take on deflationary waters USD could rise due to risk off market sentiment and a liquidity bid, or it could decline due to the lone fundamental advantage it has held to this point; very firm Fed hawk policy.

A once again less structured edition this week as a commitment popped up this weekend and I want to make sure to hit the important points first.

Precious Metals

We might as well start where the (positive) action is. The precious metals. We have highlighted reasons to be cautious, like for example, GDX having bounced to the first resistance level at 30 (ref. Oct. 17 video update), where it was twice contained (on Wednesday and Friday). Our objectives are resistance at 30 (check), 30.55 (SMA 200) and above 31 and the red neckline to be set free, technically.

On the downside, there are a couple gaps left recently on the rally off of the wedge low. Forewarned = forearmed and all…

We have highlighted reasons to be optimistic, like for example, the stripped down chart showing more than enough wedge touch points in place to break the wedge and perhaps end the correction. This wedge is a dramatically long bull flag. That’s what a falling wedge is. The flag is broken to the upside after making 6 touch points, which means the wedge was ready and viable. This non-Elliott Wave analyst has also added 5 (green) waves down, which could also be indicative of a completed move.

More positives are the inter-market ratios of gold to cyclical markets. War is driving gold to some degree, and that is a reason for some caution. But it is also driving crude oil, and gold may have bottomed in relation to oil and the CRB index. So, how much war hype is actually in gold? We recall as well that the 2001 bull market began amid a terrible time of war after a long bear market. This move begins after a long relatively bearish phase of over 3 years.

Indeed, it may simply have been time as the monthly log chart advises. In other words, the recent low, which had been our primary downside target, was probably going to hold regardless of war.

Here is the daily chart showing the hold of the a higher low to the March low. It’s almost as if gold dive bombed expressly to fulfill that obligation and then sprang right back out of that hole. In the context of the correction from May, is gold really too far extended? No.

Silver is often the leader and as yet it is not leading anywhere bullish yet. The best that can be said currently is that it has risen to the proving grounds, where it will either bust the correction or resume it. The higher low to March was key and it still is. At the October low silver too had done a lot of hard and extended corrective work since May.

I would continue to have caution on silver’s leadership at this time as the Gold/Silver ratio (GSR) is still perched constructively. If the GSR resumes upward and brings the USD with it there would be increasing liquidity problems indicated for markets. This could pressure gold stocks as well.

Although it is worth noting that the miners often, but not always, prefer silver to be leading. An exception was the beginning of the bull market in 2001. It is a little ‘cherry pick’ in time but importantly, that was a time with many parallels to today (war, hawkish Fed into 9/11, among them).

So I will be open to the miners, which topped over 3 years ago, going against the outgoing macro tide that a rising GSR would forecast. But this would likely only apply if the US dollar does not join the GSR (the blue shaded zone below was a time that the USD made a major top and declined hard). So if the macro were to come under pressure and it does not feature a rising USD, the de-dollarization camp will have its day. *

However, with the USD unbroken (i.e. not yet indicating a bull trap) why not just be patient and collect income? USD will eventually either confirm its break above the March high and head higher or it is going to fail into a bull trap. Within those options, there is a good possibility of a failure and correction that tests support and the SMA 200 in the 103s, which could set the inflation trades free in Q4 before halting them later if USD holds that support.

* When I make fun of stuff like that (slogans like “de-dollarize”) I am making fun of the short-term hysterical emotion and promotion that defies sound real time market analysis. I actually think “de-dollarization” has a chance to play out in the big picture.

We have not checked out Gold/Currencies in a while and this week we note that gold is constructive at worst in global currencies. A healthy bull market would include gold rising in all currencies. *

* Well, not all currencies. If gold remains trapped in this state vs. Bitcoin I will have revealed myself to be an old fashioned, out of touch, crusty market manager who’s just not with it. But I will continue to view gold as value and Bitcoin as whatever speculation or play on the future of currency that it is.

Gold’s Commitments of Traders showed a contrary bearish lurch by large Specs to cover shorts and increase longs and Commercials to increase net shorts. Interestingly and contrary-bullish, the little guy actually sold the rally and bumped up his shorting. It should be noted that the data were collected just before gold made its best move, breaking out above the daily SMA 200. So pro-gold enthusiasm likely jumped on Wed-Fri.

Here is a graphical view of the gold CoT situation. We have been noting that gold’s CoT was contrary positive but not extreme. An extreme came in 2018 and 2019, when we managed the end of the bear market and the beginning of the still intact bull market (as gold rammed above the 1378 “bull gateway”). In having done what it did about a year ago, into a seasonal low (on average) time window, CoT did all it needed to do to create a positive contrarian setup prior to the recent bounce/rally.

Note that silver also had a jerk toward the contrary negative side but its starting position was less constructive than that of gold. One conclusion could be that gold is prepping to out-perform silver.

Precious Metals Bottom Line

• Miners are just under the technical proving ground at which to bust bullish if this leg is to continue. That means it is also an area that could instigate a pullback.
• War or no war, gold is breaking its poor standing vs. stocks and commodities. While hawkish (and very tight) monetary policy is still a drag, there is no long-term bull case without the proper fundamentals. They are improving.
• There is a war bid in the precious metals and we have to deal with that. But per 2001 we can continue to not over react to it. The precious metals have been in correction for over 3 years. That has been the opposite of embedded froth in the market.
• The technicals will guide.
• Using gold stocks as the example, if GDX (above) finds resistance and pulls back (there are gaps at 28.30 and 27) it could be a buying opportunity, assuming the rest of the macro continues in correction and drives gold’s ratios to risk ‘on’ cyclical markets (like copper for example, against which gold is spiking hard even as China tries to stimulate its economy) higher.
• There is a historical analog to a situation where the Gold/Silver ratio rises but USD drops. That would likely be the precursor to a hell of a global inflation trade, as it was in 2001. But the inflation trades lagged by nearly a year after gold and the miners bottomed and turned up.
• As usual, we are watching gold and the gold miners (with silver and its various signals in the side car) to be leaders in the macro. Even during the 2004-2022 inflated macro that was unhealthy for gold stocks, they did lead at points like Q4, 2008, Q1, 2016 & Q1, 2020. But with the new macro, we are looking for the potential of secular out-performance if/as the 2+ decades old “everything bubble” really will deflate.
• Generally, I want to be giving benefits of doubt to the bull case because the macro is shifting in profound ways and the old rules are getting thrown out. Perhaps one of those obsolete rules is that gold stocks must always under-perform gold. Well, if the cyclical macro tanks in relation to gold as expected, gold stocks will have positive, not the usual negative, leverage to the gold price.
• I like gold better than silver. Always have on the big picture and if the Gold/Silver ratio turns up again things should get interesting for the precious metals along with many other markets. We introduce this week the prospect of the GSR rising without USD, as happened in 2001-2003 to the benefit of the gold mining industry.
• But of course, if GSR and USD rise together, there could be significant volatility all around, including in the precious metals. Until/unless USD fails or starts making new highs, we do not have the signals. Why force it at a time when cash is a great risk manager.

Markets

The view for SPX has been that a smash down into support beginning at 4150 would be best for a would-be contrary bullish view, perhaps into/through year-end. SPX tested the SMA 200, which was the bare minimum for the correction to achieve. But now on a second test, the likelihood of failure at the SMA 200 is greater. We can now continue to watch for a test of support that holds and springs a potentially strong seasonal rally, or fails and potentially sets loose the next bear market.

Notes:

• Banking sector and wider financial system health is indicated to still be intact by a very sedate T-bill/Libor yield. However, fellow stress indicator High Yield Spreads remain elevated off of the September lows, which were highs in investor complacency (the VIX also bottomed out back then and has turned up).
• A systemic stress indicator itself, the 10yr-2yr Yield Curve is poking new highs in its steepening effort to negate the inversion. The curve has steepened from -1.08 in July to -.14 currently. Here we’ll insert the prospects for the Gold/Silver ratio as well. The GSR is a fellow stress indicator and it is poised to rise.
• While SOX > NDX > SPX market leadership is clinging to intact status, the Semis are really having trouble at the front end of the chain. So much so that it bears close watch from here on. If SPX is going to slam support as noted above and hold for a bull phase, Semis would probably manage to retain leadership. If not, Semi could lead the way to a new bear market cycle.
• Market breadth continues to be a problem, alarmingly apparent in the ratio of equal weight SPX to headline SPX (RSP/SPY). On the chart above we manage the technicals literally as we see them. On pictures like this, however, we consider the real possibility that the market has already double topped.

US Market Sentiment

As I am short on time this weekend, let’s just note that the main theme is that the bull was born in Q4, 2022 amid the proper extreme contrary bullish sentiment signals and it was indicated to be killed (regardless of what it does on the near-term) sentiment-wise, last summer with at least equal and opposite contrary bearish sentiment.

We have noted for the last several weeks that the current sentiment structure is not compelling for either the bull or bear case and thus, not standing in the way of either case.

Global Picture

And it is just a snapshot this week, as not much of anything, asset market wise, appears to have the allure of good old fashioned interest bearing cash. Thank you Federal Reserve. You make the waiting worth it. Meanwhile, ACWX is a blunt instrument that cannot possibly encompass a world of equities, but most of the world is either already bearish or breaking that way. In scanning the chart list I did not see anything, any region or country, beckoning for me to buy it. All I see is bearish or breaking that way.

Last week we noted that the drop to a higher low to the March low as suspect because the March low was a fairly normal test of a moving average that needs testing every so often. ACWX bear crossed the moving averages, had an obligatory and minor bounce in the face of that has failed, now ticking below last week’s “suspect” low. This is a bearish picture.

Commodities

• CRB index is still above its base breakout and thus, targeting 305 (current: 286).
• Crude oil (WTI) is driving the commodity bus and thus, targets 105 (current: 88). I temporarily hold USO to hedge winter heating costs a bit and realize that it’s being politically driven and is not a reliable macro market indicator, like…
• Copper for example. The good Doctor is prescribing economic pain in China and likely much of the rest of the world, US eventually included. Copper has been trending down for all of 2023 and its ratio to counter-cyclical gold is also bearish. Industrial metals as a whole are bearish. One day when governments debt spend to the max in order to make war reparations we can think about big inflation trades. Today is not that day.
• NatGas retraced its base breakout and could still be bottoming. But I took the profit in hand in AR in what I consider to be a precarious (at best) broad market.
• The Uranium sector has generally been grappling to hold the 50 day averages. And it is doing so in a not technically unattractive way. Hence, I added NXE back just to have a marker in. However, a test of the 200 day averages could well come about if the SMA 50s fail. It’s been a while for such a test. u3o8 remains a favored big picture macro target.
• I think there will be a time to buy the PGMs, especially Palladium, if it hits the long-term support levels we’ve been watching. As yet however, they are bearish and of little personal interest. The buy zone for Pd bulls appears to be in the 800 to 1050 zone (current price: 1111).
• REE equities have tanked with REMX making new lows and favored (for its strategic future as a US based producer) watch item MP still deep in the muck as well. Lithium plays ALB and LTHM are making hard new lows. Is any of this cyclical, inflationary signaling? Ah, no.
• Agricultural commodities remain in a downtrend going by the index (GKX) and a sloppy pattern going by the fund (DBA). Either way, little personal interest at this time.

Commodities Bottom Line

I am not interested in them (outside of a temporary position in crude oil and any strict trades I may take) because the macro is wrong for commodities. It was right for commodities in H2, 2020 when we got bullish on the inflation trades. If things follow a logical progression, a commodity bull phase could come well after a precious metals bull phase.

Portfolios

Savings balanced by gold

Trading Account: Short XME (metals & miners); short on PANW covered. XME tested my patience last week by poking above the moving averages. Then it did the right thing to end the week. PANW was covered simply because it tanked right away and I was not going to let the little profit birdie fly away.

Roth IRA (non-taxable, no contributions)

Cash is 88%, as it was last week at this time. I short the gold miners because I want to at least partially hedge the positions I’d like to hold barring evidence of a final correction low upcoming. That does not appear to be the case at this time but I, a cautious sort, remain alert for it. You could say I care enough about the miners to short them in order to resist selling. I have no such resistance to selling broad stocks. As an example, DVAX appears to be weighed down by the weak Biotech sector and it is flashing a double top at me, which I am ready to sell at any time.

It’s so easy to remain patient when he Fed is paying you to stay safe and evaluate risk. At some point, I expect the big trend to be counter-cyclical gold over cyclical assets and the gold mining industry to leverage that standing. i.e. the opposite of what generally went on from 2004 to 2022.

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.