Summary
US Stock Market: 3 wave A-B-C correction for SPX is out the window and now it is the projected scenario of a deeper (5th wave) drop into the support zone. From here SPX will choose whether to enter a technical bear market (take out 3808.86) or simply fill the 3979 gap and put on a seasonal rally within what may already be a bull market having topped in July. If it does rally, such a move would come amid…
US Market Sentiment: …increasingly over-bearish sentiment. As yet not extreme but favoring the contrary bullish play, for a seasonal trade at least. Our best view for a tradable rally was originally for a hard corrective test, which could provide sentiment fuel to a similar, albeit lesser, degree to Q4, 2022. A “bull killer” over-bullish sentiment reading was registered last summer, however, and it was equally extreme to the “bull birther” a year ago.
Indicators (as per last week): 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 (as per last week): In my view, this comes later. Perhaps at the trigger of a deflation scare.
Global Stock Markets: 2 weeks ago: Not bullish on balance, and subject to the US dollar. Last week: It’s worse. This week: worse still. See segment for updated charts.
Precious Metals: Risks: War bid and vulnerability to a harsh broad market correction or crash. Positives: Fundamentals improving, short-term technicals still intact and now the Q3 reporting season is already partially behind us and the miners have absorbed its generally negative tone. In other words, all things being equal the sector could be looking ahead to the improving fundamentals that are in process. Again, see segment below, including some fairly complicated but important info on the 2024 macro as it relates to the precious metals.
Commodities: Still little personal interest here as inflation continues to fade and the greater commodity and resources markets continue to tank. CRB is being driven by crude oil, which I’ve kept a position in. If USD and GSR rise together commodities could eventually put in a hard bottom. But there is no sign of such a bottom now. Meanwhile, CRB is still targeting 305, technically speaking based on its base breakout.
Currencies: Last week: 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. This week: USD broke upward from a little bull flag that it formed last week. GSR remains firm. Hence, short-term caution in risk markets.
US Stock Market
The stock market is on track to our original preferred outcome after bull trapping up in July, reversing downward and correcting ever since. SPX is on a 5th corrective wave down and not surprisingly has cracked support around 4150. It’s not surprising because markets often test souls rather than do the gentle, logical thing. With the war drums in the background amplifying again last week the intensity of the correction makes even more sense.
I am no Elliott Wave TA, but I would gather that if this were to be a more routine correction it would have corrected A-B-C down and bottomed with the early October test of the uptrending SMA 200. By taking one more wave up, failing at the SMA 50 and now impulsively cracking the SMA 200 deeper into the support cluster, I think we have a rhyme with the sentiment view we’ve been operating to; any coming seasonal rally (if applicable) could be the final act of the bull market after the “bull killer” Smart/Dumb sentiment reading last summer.
The objective now is support at the 4000 round number and a gap fill just below that. It may not be the popular thing to write at this time, but the end of year seasonal rally scenario is not only not dead, it could be given more power by an intense correction to fill the 3979 gap. The market could also be beginning the bear right here and now. But that will not be proven until/unless SPX loses 3808.86.
The US market already qualifies to have made a double top bull ending move in not only SPX, but even more so in the leaders, SOX and NDX, which each tested their 2021 highs but also held below them. So let’s not be cavalier about a seasonal rally. Let’s just be accepting of one if it manifests when SPX finds a firm low.
The leadership chart (daily) continues to show Tech leadership over the broad SPX but Semiconductor weakness relative to Tech and broad. If our chain that has been so reliable over the years holds true (SOX > NDX > SPX) then SOX should not decline any further vs. the other indexes or a warning will be in place for the bull. Meanwhile, you can see why the specs I’ve added (ANET, MSFT & AEHR) for a potential year-end rally are Tech related.
Although, with the downside in markets last week I sure was tempted to add other areas, like dividend paying value stocks. These items are apparently losing their dividend appeal because the bond market is paying out over 5%. Speaking of which, the S&P 500 is not nearly to the level of many individual dividend paying stocks, clocking in at 1.62%. That is not a good investment case for stocks vs. bonds right now.
But if yields top out per my little guru guessing exercise (via X, on 10/23) the market could rotate toward dividend paying value stocks, or at least include them rather than punish them as has been the case since July.
Isn’t it interesting that in 2022 the tout was to buy value stocks in a rising interest rate environment? Well, that worked for a while, but now if the markets do avoid entering a bear at least there is potential reason (a top in long-term yields) for a rotation to divy paying value. I have items like GILD, ABBV, CVX, BMY, etc. on casual watch for such a scenario.
But first we have to either complete the correction and find a bottom or negate the bull and prepare to manage a bear market breakdown. Let’s be clear that the seasonal rally scenario could pack a real punch but also that it very well could fail to materialize. The market remains in correction until it finds support. If it fails to find that support we have our bear gateway at SPX 3808.86.
Indicators
Libor/T-bill Yield is still asleep and beneficial to a year end rally scenario.
High Yield Spreads continue to be a bit elevated but are not yet indicating acute danger.
However, the Gold/Silver ratio (daily) continues to sport a nasty look, at least for the inflation trades and inflation sensitive cyclicals. If the monetary metal continues to rise vs. the less monetary, more industrial/inflation sensitive metal, a warning will be in place for not only the inflation trades, but eventually most other markets as well.
Think of it in the context of the bond market. If I am correct (caveat: just a gut based guess) about yields having topped, a year-end rally could squeeze into the picture on relief by casino patrons and then later, when the yield pullback gains enough momentum relief would shift to deflationary fears. Sound like a plan?
The Continuum from the 1980s is broken. The former red (resistance) limiters (monthly EMA 100 & 120) are now green (support). But a knock down even to 3% to 3.4% would feel like deflation from the highs above 5%. It’s worth considering. So the GSR above could rise with a Goldilocks flavor for a while as disinflation continues and gains momentum. Then the morph to deflationary pressure would start to boil the little froggies in the pot who thought they were in for a pleasant swim in disinflationary waters.
Real yields are still very elevated as the Fed continues to feel pressured to keep up the hawkish monetary stance for whatever reason suits best. We can continue to factor in the debt spending government as a potential fiscal inflator that the Fed is aware of and sitting on the opposite end of the seesaw to. Here is the real 10yr, implying very tight monetary conditions.
Regarding the above, it is interesting how many commodities and markets have bent in the face of this condition while gold, usually thought to be very inversely correlated to real yields, flies around just below 2000/oz. The concern of course is that the world at war has a growing influence on the gold price.
Let’s borrow a daily chart from the Precious Metals segment and review. Gold/Stock Markets has impulsed upward as it would do on war hysteria. If this is an emotional knee jerk to be corrected it could feed into a positive seasonal view for stocks and risk to the gold price. But a couple of points here:
- As noted last week the 2001-2003 phase of oncoming war sure was not a negative contrary indicator for gold. A real bull market began amid war. The US dollar was declining at that time, however, and that would probably need to be an element today as well for gold to remain firm if the war bid starts to fade. Remember, there are plenty of people who think ‘OMG, war! Gotta get my hands on gold!!!’. Lump them into the same pile of investors who think ‘Inflation! Gotta get my hands on gold!!!’
- In support of a positive gold view, let’s also note that the 2001 bull came amid war after a 20 year bear market, and the gold price is currently coming off over 3 years of going a volatile sideways (see second chart below) and vastly under performing stocks. How much froth could have gathered in gold and the precious metals sector? Not much by historical standards.
- Another point is that if both gold and crude oil are getting war bids (they are), gold has been getting bid better than oil since breaking the downtrend a month ago. It feels like a counter-cyclical signal, as with Gold/CRB and Gold/Copper.
The weekly chart makes the point about how little froth there is in gold compared to US and global stock markets and commodities. So the war bid, to the degree it will affect the gold price on a negative contrary basis going forward, does not appear overly dangerous.
The 10yr2yr Yield Curve is steepening. We originally reviewed this chart just after the secondary inversion extreme with the question about a new steepener. As often noted, it is not the inversion – so loudly trumped by media – that gives the warning of an imminent market/economic bust. Inversion is a product of a flattening yield curve and the flattener is where the boom lives. The steepener is where the bust lives. The curve has been steepening since the secondary inversion in July, and is just a few ticks from ending the inversion. This could also be factoring into the firm gold price in the face of highly elevated real yields. A steepening YC is counter-cyclical and so is gold.
US Market Sentiment
Dumb money sentiment has dropped and Smart sentiment has risen, increasing the contrarian odds for a seasonal market rally. But again, bull killer reading came last summer as both dumb and smart hit the opposite extremes that began the rally in Q4, 2022. Hence, if the market does rally we should keep words like “seasonal” and “trade” in mind as opposed to “investment”. I continue to expect a solid bear market in 2024.
- In line with the bearish stock market activity NAAIM (investment managers) took a drastic drop in their optimism, from 67% bullish on October 18 (and over 100% last summer) to 25% on the 25th. NAAIM sentiment is contrary positive for the stock market.
- As of the 24th Investors Intelligence (newsletters) had dropped the bull/bear ratio from over 3 in the summer to a muted 2.06. II tend to be a little more muted in their moves, less prone to knee jerking than NAAIM or Ma & Pa. Maybe because they don’t carry the weight of managing other peoples’ money (NAAIM) or their own money (Ma & Pa). But II is currently fairly neutral as a contrary indicator.
- AAII (Ma & Pa) remain at an over bearish .7 bull/bear ratio, down from 2.5 over the summer. AAII is contrary positive.
Bottom Line
Market sentiment continues not only not to stand in the way of a seasonal rally, it is now favoring one. Caveat: a real bear market, when it begins, will take negative sentiment to great extremes before springing rallies or ending the bear. So let’s realize that the big picture view is bearish and interim view is open to a rally. The a “bull killer” Smart/Dumb was registered last summer.
Global Stock Markets (daily charts unless otherwise noted)
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.
On an individual daily chart of ACWX we noted that the March breakdown was a bear trap to simply test the SMA 200, but that the early October drop to test that was more suspect. Well, “suspect” will turn to failure if it takes out that low (44.52). It was suspect because of the status below both moving averages and that is still the case and this is bearish until proven otherwise by holding 44.52 and rallying.
Europe has ticked a new low to the March low. Bearish. UK is resuming its downtrend. Bearish. Commodity/Resource heavy markets of Canada and Australia have broken to fresh lows. Bearish.
Japan’s Nikkei is approaching the level I’d want if I were to be a buyer. Here is the big picture monthly chart. The pullback started from an area that was too close to the measured target we established years ago to consider buying. Now, I’ll keep a casual eye on it in case I feel like speculating.
The daily situation shows that NIKK would have to tank the SMA 200 in order to bring about that support. I’ll stay patient, thank you. A bear market is likely coming after all and it’s not going to exclusive to the US.
Hong Kong, Asia and EM are furthering their downtrends and the TSX-V continues to burrow southward, possibly to provide a seasonal tax loss trade for the cow pastures and holes in the ground up north.
Meanwhile, even India has succumbed to the bearish pressure with a snazzy little breakdown this month.
Brazil is curiously intact at the SMA 200 and lateral support. Argy is still demanding “I am not a bubble! See, am making another test of the SMA 50!” Could be worth a look for those versed in LatAm and in particular, Argentina.
Mexico.. aye aye aye is that breakdown intensifying. Africa ETF robo trends down and FM has completely broken down.
Global Markets Bottom Line
A whole lotta bearish out there. Seasonal rally or not, it appears a bear market has begun in many markets, if not yet comprehensively global.
Precious Metals
The daily gold ratios chart in the Indicators segment tells a story of improving sector and macro fundamentals. Friday’s public article tells that story and updates the technical situation for GDX, which is the same situation we’ve been managing since the hard low and bear trap reversal in early October. Nothing has changed. There is valid rationale for a continued rally and an end to the correction, or for a perhaps final plunge to make a bottom.
The daily chart TA from that article is still valid. GDX turned up after filling the 1st gap. Now we see where it goes from here. It probably got boosted on Friday by degrading events in Israel and Gaza, and that is not pleasing to me. But the fundamentals are turning up again and it remains to be seen whether Q3’s poor fundamentals show up in gold stock prices in next few weeks. Previous NFTRH reports and the linked article review that situation. Again, there is rationale for both outcomes, ending the correction or resuming it.
As a side note, current holdings like AEM, AGI and SILV have already provided quarterly results and/or operational updates and they were generally positive or in line with expectations. So we may well be getting beyond the Q3 results question. Let’s see how the rest of the big boys report this season. The average fund managers sees Newmont, Barrick, Agnico and Kinross as the gold mining sphere. Of note, NEM and AEM have reported and GOLD and KGC are still ahead in November.
We should respect the upcoming technical indications. TA can be good for those times when fundamental and sentiment analysis are unclear or in transition, as the funda are today. The gold stock rally is intact, halted where it should have halted, filled one of two nearby gaps and ended the week above the SMA 50. Now the Q3 caution question is being factored and so far it has not hurt the rally’s progress (a normal pullback thus far). This as the fundamentals start to improve for the Q4 reports to be released in Q1, 2024. So the other side of the equation has been ‘will the miners look ahead to the improving fundamentals implied by the Gold/Oil ratio?’, as one example.
The primary risks to the sector now appear to be war bid knee-jerking and the prospect of the broad markets rolling over into a hard bear market sooner, rather than later. Either way, I am bullish for 2024 and not willing to bet against the sector in Q4, 2023 outside of nimbly hedging (profit taken on most recent DUST hedge on Friday). More upward progress and a break above the resistance milestones we’re managing would see positioning increased. The real play, IMO, is not trading these squiggles. It will be for a longer run in a changed macro (see end of segment).
Before moving on to HUI, let’s again behold the pleasant and simplified chart of GDX showing 6 wedge touch points and a breakout after a 5th wave down.
Side note: Could this 5 wave structure in gold stocks lead a theoretic 5th SPX wave as speculated upon in the US Stock Market segment? The gold stock sector is often a leader. In this case it led with a top in May to the SPX top in July. So we’ll keep the miners in view as a market leader as well.
Let’s also take a reminder that this downtrodden sector has been beaten like a rented mule and if an end of the correction were to be at hand that very fact would be a sentiment tailwind. Corrections like this are fuel stops. This has been a 5 month long fuel stop.
The weekly chart of HUI shows a plunge into early October and upward reversal. That may well have been the low, as such bear traps often are. But I want to see the red neckline taken out (ref. GDX daily chart per the link above and previous video updates) before getting too bullish. A takeout of that neckline would conclusively break the downtrend from May.
All of this takes place within the context of an ongoing downtrend channel from the 2020 high, as the miners blasted off and were then done in by Fed and government inflationary policy on steroids, which boosted bubble markets and compromised gold mining fundamentals.
The monthly chart shows that a modest rise to break the red neckline above would take Huey to 240 or so and take out clear lateral resistance. If that were to happen we’re probably looking at a test of the upper downtrend channel line, at least. And if/when the elements come into place for a real bull market we’ll eventually focus on the upside target that has been in place (pending a correction that persists to this day) since the 375 target was registered.
Very simply, HUI is in a terribly volatile bull market from the 2016 low as it has made higher highs and higher lows. In this sector, “it don’t come easy”.
Gold’s Commitments of Traders data not surprisingly lurched contrary negative last week as large Specs ate themselves some safe haven metal and Commercial traders served it up to them (increased shorting). But again the situation is far from over bullish. Look back to the 2019-2020 period to see how far the CoT alignment can travel in contrary bearish direction before a gold price top.
Nor is silver in a compelling contrary bullish alignment but also has room to run should its price bust bullish. I favor gold as you know. Both for the long-term and with what I expect of the 2024 macro, the shorter-term as well. But silver bears watching for speculative indications in the sector. The price has not rallied and there is little speculative froth on the precious metals.
The HUI/Gold ratio (HGR) is still nowhere to be found as a bullish indication. Nor has Huey done anything vs. the broad US stock market.
But I expect that to change in 2024. Regarding the top view, if gold miners start to leverage a positive macro (gold rising in relation to cyclical assets, markets and commodities) we’ll see something like the green shaded zones on the chart above.
2001-2003 was the last great phase in the gold mining sector because it came with real fundamentals. The red arrow shows when the inflationists got a hold of the situation and touted HUI (for the wrong reasons) into a bubble. That bubble persisted all the while HUI declined vs. gold and rose vs. SPX. The above are facts that perma-bulls don’t want you thinking about. The gold stock crash of 2008 and the bear market from 2011 were fully deserved. I said it then and I say it now.
But the macro we had is not the macro we have. Often times the HGR moved opposite to the 30 year Treasury yield continuum, as it is doing today. But on the larger trend the HGR trended down along with the yield continuum. It was an age when policy makers had free license to print and blow asset bubbles at will, after all. The disinflationary signaling of long-term yields implied that license.
- Disinflationary signaling brought inflation = bad for gold mining.
- The inflationary signal of 2022’s burst upward and break of the Continuum is viewed as a lever the Fed is actively trying to pull in order to kill inflation. The Fed is, in my opinion, trying to crack markets in order to clean up their own dirty inflation mess. So today’s new macro and its inflationary signaling would bring a deflation scare, at least and economic counter-cyclicality = good for gold mining.
- When the yield tops and drops under counter-cyclical, deflationary pressure I expect the HUI/Gold ratio to leverage gold’s status in the macro and rise in similar fashion to 2001. Sound like a plan? But, patience.
Commodities
CRB is largely driven by oil. Oil has been driven by OPEC+ price manip and now the inflammatory war bid. Gas is on its seasonal rally, as we’d projected (I have AR back on watch, evaluating) and the rest of the commodity complex is certainly not screaming “inflation!” Quite the contrary. Those touting a “commodity super cycle” right now are largely cherry picking crude oil’s unique supply/demand situation.
Copper and Industrial metals and the Ags are still bear trending.
The Uranium sector broke suspect last week. I held on to CCJ and NXE, but this is as much rope as I’ll give them. Longer-term, U is still a primary investment target.
The sad chart of all those commodity related stocks burrowing southward. On the plus side, there are a lot of pent up tax losses here, so I would expect an oversold seasonal play at some point.
Of particular interest to SBSW above, the Palladium price (1130) has dinged the very upper bound of the long-term support target (1100 to 800). FYI.
Currencies
With the Gold/Silver ratio looking constructive it places all the more importance on the US dollar index and the little break upward from what now looks like a bull flag.*
The story is the same. If the GSR and USD rise together you’d want to be materially out of the pool (with certain exceptions, including bearish speculation) and collecting interest on cash and equivalents.
In the Precious Metals segment we noted that the 30yr Treasury yield spike is a handle of sorts. The mechanics of that handle include the GSR and USD. A market liquidity event would likely see GSR and USD rising and bond yields dropping.
As for stand-alone USD, the bull trap scenario is not dead but it did take a technical hit last week as USD broke the flag to the upside, begging short-term caution across the macro, especially the inflated anti-USD macro.
* After having ground into the support zone looking like anything but a bull flag.
Portfolios
Savings balanced by gold
Trading Account: Shorts covered, no positions.
Roth IRA (non-taxable, no contributions)
Cash is a very defensive 88%, although I’ve covered the gold miner short hedge, covered other shorts and even added a few specs on a seasonal rally. The Uraniums already had a big rally, so I am not eager to hold if current levels fail (the original plan was to buy at the equivalent of URNM 35 to 40 (current price: 43.53).
I have seen enough from the gold stock sector to be very careful about selling anything. I hold quality situations like AGI and AEM as well as various bottom feeds and prospects that I think highly of (and contacts I respect think highly of). I expect that at some point in 2024 this portfolio will get much heavier in its weighing of gold stocks if/as the macro unfolds as expected. But for now, patience… and interest-bearing cash.
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.
