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Summary

US Stock Market (last week): Indexes break trend channels and take out October highs. Technically bullish and the seasonal is positive. NEW: No change other than risk, which has risen.

US Market Sentiment: Neutral reading shifting toward over-bullish. Contrary sentiment no longer a tailwind for bulls. Question is the level of extreme over-bullish required to terminate the rally. According to the seasonal, that could be out in Q1 or H1, 2024.

Indicators: Poor market breadth and the bombed out VIX continue to indicate high risk. Junk bonds continue to indicate intact speculation and risk ‘on’. Real Yields are weakening, which implies softening monetary policy (positive). 10-2 Yield Curve is easing and still inverted within its new steepener. This has logically come with market relief. When the curve un-inverts and steepens it will imply an oncoming economic bust. It’s in progress, in my opinion. Inflation signals, like the 10yr Breakeven, took a hit last week and folks, we are on plan.

Fiscal Inflation View (as per recent weeks): In my view, this comes later. Perhaps at the trigger of a deflation scare.

Global Stock Markets: The mixed bag is less mixed now because a common feature of many global markets is a sensitivity to the US dollar. USD dropped, the world on balance, popped.

Precious Metals: Gold, silver and the miners appear poised to rally. See segment below and Thursday’s public article for details. If they do rally (GDX target of 40+), they will be a ‘sell’ at some point if they rally along with a stock mania in blow off stages. If they fail, they could get on with the ignominy of finding a real bottom prior to a real bull market. But I think the sector is going to bust a move (watch GDX 30) and party, potentially into February.

Commodities: Commodities are not good and have not been good. That is because inflation signals have not been good. They have been doing what we’ve projected for a year now, dis-inflating. Uranium is a standout exception as it is less inflation sensitive than copper, for example. As a whole, many commodity/resource stocks can participate in a post-tax loss seasonal rally, assuming a still weak USD.

Currencies: USD was already suspect in its bear flag and last week’s CPI report knocked it right off that perch and into a correction that everyone sees. If it remains weak, it would benefit a global seasonal bull view. That is especially the case if the Gold/Silver ratio, USD’s partner in liquidity stress, fails as well. It hasn’t failed, but it did pull back hard as silver broke hard above its moving averages.

Party On Wayne, Party on Garth (With Risk Awareness)

The word “risk” is not meant to scare people. It is a condition that accompanies bullish phases. By definition, risk rises along with price. In the case of the ongoing 2023 rally, risk was very low a year ago when we projected a coming rally (initially, just for Q, possibly into Q2), now marching on a full year later.

Risk became very elevated in July, to the tune of the bull killer sentiment reading we’ve noted. A Risk/Reward proposition is a poor timer. Think about how elevated risk was for Tech stocks in 1999 as the bubble climbed ever higher, week after week with compounding mania (MOMO, FOMO & PROMO) as the fuel. The market eventually became saturated with risk and took care of the situation with a reversal and crash.

Extrapolating to today’s market, we had an over-bearish sentiment extreme that launched the 2023 bull phase after a very minor bear market in 2022, which as you know I view as not a bear market even worth that title. Sentiment readings dinged opposite to to Q4, 2022 in July of this year. A multi-month correction ensued as the Fed remained hawkish despite the obvious fade in inflation signals, which we projected a year ago and which have slowly but surely been fading. Now Dumb money is spiking again. Chasing the rally.

As for today’s situation, see the list below the graphic.

• Now that the public is finally realizing that the inflation story is ending or at least interrupting (ref. core CPI release last week), and given the multi-month market correction, a relief rally makes sense.
• Aiding that view is the fact that sentiment got tamped down quite well from the July bull killer. As we’d been noting prior to the most recent rally leg, sentiment, while not extreme by any means, was biased contrary bullish (over-bearish).
• Dumb money, AAII, II and NAAIM sentiment are all springing back to life, chasing the market. As yet the readings are not extreme and it remains to be seen whether another extreme will be needed to blow off the bull, considering the bull killer already registered. Sentiment allows for more rally but is no longer an ally of the bull case.
• The seasonal average indicated a low and hard upturn in October, and damned if that did not play out.

Bottom Line

By definition risk is rising as the market rises. That is not a predictor of when the market will stop rising. But it is a condition that risk managers should remain aware of. The best bull moves often happen amid untenable risk (e.g. Nasdaq in 2000, Silver in 2011, etc.). Risk is proven after the fact (of correction), not before it.

US indexes are on a rally in line with the average seasonal, bolstered by inflation/Fed hawk relief and a still intact economy, with a predictable ‘soft landing’ promo in play as well.

What could go wrong? Through the positive seasonal (into February), maybe not much. But risk is high and rising. The NFTRH view continues to be that when this particular party ends, it will terminate the big bull market. Just look at that media spectacle above. Ongoing awareness of risk will be important.

Meanwhile, SPX has left two gaps on this up thrust. In breaking the price above the moving averages and reestablishing the uptrend, they do not need to fill any time soon. But they do add another factor to the view that the market is on borrowed time, as they’ll lay in wait to fill in the next bear market.

Currencies

USD had technical reason to drop after it bear flagged upward to test the breakdown below the March high and 50 day average. Then the tight monetary policy theme took a hit on fading inflation data, and USD lost its fundamental underpinning. Then came a de-hawking by CME Group Fed Funds speculators, who in essence, now project that the Fed is done for the cycle and will begin cutting rates next spring.

I thought the most recent little bear flag would last longer and move upward like the previous one did, but instead there was another drop on Friday. Regardless, the initial target is and has been 103.50 (+/-). It’s almost there.

Let’s take a longer view showing an ongoing long-term bull market. USD would have to drop below 90 to break the bull. Meanwhile, there are plenty of support levels below the 38% bull market Fib retrace level that it registered during the 2022 correction. If a new correction leg is beginning now it could go as deep as the 50% Fib, which coincides with important lateral support at 93. You may recall we had this target on radar last year, pending the bear trap breakdown and upward reversal in July of this year.

If that target is viable there is implied to be a lot of bullish running room for anti-USD markets. In other words, the global asset party could extend well into H1, 2024. Fundamentally, the USD continues to have little support until the next market liquidation jerks newly risk averse players into the reserve currency. So, it is possible that securing a new and major bear market view will not come easy if (reserve) currency debasement is the bullish input.

Bottom Line

USD took a hard and deserved hit last week, furthering the breakdown from the daily chart’s bull trap. Support is upcoming at 103.50, our first target. However, if this bear move persists as the weakening Fed story implies it should, there are several support areas all the way down to the 50% bull market Fib retrace level. If the markets decide to liquidate, any one of those could prove supportive for USD. Meanwhile, it appears a bear phase has kicked in for the buck and in the near-term it would be beneficial for many markets.

Global Stock Markets (daily charts)

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.

As USD tanked and inverse USD popped, that was of course a positive marker for global stocks on the whole.

World (ex-US) has not surprisingly taken out the moving averages on the USD non-supportive CPI number. Europe and Canada made strong moves as well. While UK and Australia lag a bit. But in general, our thesis has been that the global picture needed a correction in USD in order to rally and that is what happened.

Nikkei remains bullish, EM (inherently anti-USD) is trying to bust bullish while Hong Kong, much like Chinese large cap stocks, continues to trend down.

India is reclaiming the SMA 50, but looks sloppy (unlike for example, Nikkei).

Canada Junior (TSX-V) is bouncing and its components can be watched for the end of tax loss selling season out ahead. There could be a solid ‘January effect’ for many of these items.

Brazil is now flat out bullish and a reflection of the USD in correction. Argentina is grinding the SMA 50, now a little suspiciously in the duration of its grind.

Mexico is bouncing anti-USD. FM is bouncing anti-USD. Africa is robo trending down.

Precious Metals

GDX did good work cracking back into the wedge to fill those two gaps it left in early October. Then it launched back up and out of the wedge. Today it sits on the 50 day moving average, which we’d like to see hold to keep the short-term case looking good.

As you can see, nothing is yet technically proven with respect to definitively ending the correction from May, although the gap fills and Friday’s hold atop the SMA 50 were positives. But the real get out of jail level is and has been resistance at 30 and the SMA 200 curling down to meet it.

Gold held right where we projected it should hold, at the moving average convergence and associated support. It is dealing with resistance again, but if it takes this out I would not be surprised to see a new all time high upcoming in the near-term.

Silver rammed the moving averages and turned both RSI and MACD positive. If it breaks through 24.50 we could have quite a seasonal party. Taking out the previous high from October was clearly positive.

HUI/Gold ratio (HGR) is still no friend of the sector from an internal standpoint, although on this cycle nominal HUI is firmer than the HGR. This is owing to the strength that gold has shown while the ratio goes on to make perhaps a double bottom to the low of a year ago.

An interesting feature of the chart is that the 2022 HUI low pretty much coincided with the ratio with no divergence. The ratio did diverge negatively prior to the two major corrections within the post-2022 cycle and has under-performed the index ever since. An important point here is that new sector rallies do not tend to start with a positive divergence by the HGR. They tend to start despite bearish trends by the SGR as per the March low or per the Q4, 2022 low with an in-line signal. If the macro fundamentals continue to improve this can be viewed as an oversold reading on and hatred of that most despised of sectors, gold mining.

BPGDM continues to show a decent risk/reward setup as an oversold sector has only begun to recover and not nearly to the degree that most recoveries achieve, even if destined to ultimately fail.

Contrary to popular opinion, gold stocks do not benefit from inflation and this chart shows that from a technical angle. Other than during bubble periods or times of mis-allocation HUI tends to stay nicely in line with gold’s relationship to inflation expectations. Gold’s break upward vs. RINF last week made sense. It would also make sense for HUI to follow it, assuming the move in Gold/RINF is real.

Meanwhile, the greatest beneficiary thus far to the decline in inflation signals is of course the stock market. Because why should not stocks do better than gold during inflation and during disinflation? It’s little wonder being a gold bug is such a bitter experience.

However, we are in the Goldilocks disinflation phase, after all. So it makes sense. What also makes sense is gold’s out-performance to commodities during this phase. It is when Goldilocks transitions to liquidity crisis that gold will ram upward vs. stocks as it furthers its progress vs. commodities. It requires patience and as Ringo and George told us multiple times in last week’s report, “it don’t come easy”.

But gold’s real, commodity adjusted price is on track sniffing out disinflation and if/when it sniffs deflation later it should rise vs. stocks as well.

As for miners/royalties held, it’s a fairly tight group:

AEM, AGI, EQX, SILV, WDOFF (WDO.TO), OGNRF (OGN.V) and WPM.

I looked around, considering adding BTG but until I better understand and/or come to terms with its Mali risk I’ll keep it on watch. In researching the situation I found that the Mali mine is 58% of its total and while I understand the government’s reasons for putting the touch on local miners, I don’t have to invest in those reasons. The problem for me is that B2 Gold owns the former Sabina Gold & Silver, a northern Canada property I very much do want.

I looked at NGD, KGC, EGO and a miner that Fred Lacy likes a lot, CXBMF, which just bought out Marathon Gold. He likes it on cheap valuation relative to operational performance. It produces in Nicaragua and for me that’s a non-starter. Political threats are a non-starter. I am no expert on Nic or LatAm, but I have seen enough over the years to know that avoiding the less friendly sounding names has been a solid strategy. Someone please alleviate my concerns (hello, Fred) and I’ll reconsider. Same goes for BTG in Mali. ;-)

Then there are the TSX-V robo (down) trenders. Primary on watch is MAIFF (MAI.V) and I also added TORXF (TXG.TO) to watch. Of note, TXG was awaiting similar permits to those MAI is waiting for and they came through. Still, I am waiting a bit more on MAI, possibly until tax loss selling season looks to be ending (mid-late December). Another tax loss seasonal item on watch is AMXEF (AMX.V), which I like for the fact that it is located in mining friendly Quebec.

Commodities

Being a macro market report NFTRH does not have a large amount of bandwidth for stock picks. But at a seasonal point like this we’ve been discussing some in the Trade Log and here in the weekly report as well (e.g. Palladium and Pd producer SBSW). As tax loss selling season eventually morphs into post-tax loss buying season there could be a lot of downtrodden items due to rally. Like SBSW and this list of items, which I expect to grow as I continue to look for seasonal specs and bombed out situations. Note that Tech stock DOCU was among them until I added it as a bottom feed a couple of weeks ago. Tax loss selling specs will certainly not be limited to the commodity space.

But I am also considering other items within the commodity complex. I mean, if the thing joins the seasonal and rallies, there could be several quality stocks to use as vehicles. As one example, Copper is trying to bounce and undo its bearish state. It is trending down, but it took out the daily SMA 50 and if I get a bullish feeling on it I’d like to consider a couple Cu miners.

SCCO gapped up on volume and took out both moving averages. If it takes out resistance just overhead, it could be headed for a new high.

FCX is not as nice, technically, but could also pop if the coppers take a seasonal rally. They are probably as ‘anti-USD’ as the next guy, after all.

They are not priorities, however. Just ideas that I want to make sure we are on top of. First it was uranium, then palladium and now copper. I guess.

CRB index is still in an ugly pattern at the behest of crude oil. NatGas got thumped below the SMA 50, threatening its base building situation. Industrial metals, along with copper, continue to trend down. The Ags are making a little move within a downtrend. As you can see, commodities on the whole have not been the place to be in a disinflationary 2023.

However, uranium has discrete supply/demand fundamentals and the sector is doing quite well. Last week it was noted that I’d sell URNM (sector) if it lost the SMA 50. But it held nicely so I just hold. I also have an eye on UUUU and NXE as usual.

Here is the chart showing various commodity/resource related equities and their robo downtrends. As noted, I added the commodity (Palladium) rather than the stock (SBSW), which is on watch for the seasonal. I want to get a better handle on Lithium (all that hype, after all) before committing to ALB and/or LTHM. MP remains very much on watch for its unique US Rare Earth property. But equally as important, it is subject to China’s REE price pressures and last I looked, still needs to have its REE materials processed in China. All that aside, it looks like as good a tax-loss seasonal spec as anything else.

Bottom Line

Inflation signals are fading. As we’ve noted all year this is not good for commodities as a whole. But relief from inflation (and Fed hawking) could dovetail with a seasonal bounce. Maybe get the ‘Commodity Super Cycle’ cult puffing out its chest again. But generally, commodities are down for a reason. Specifically, however, uranium continues to march to its own drummer (not Ringo, for whom it don’t come so easy).

Portfolios

Savings balanced by gold

Trading Account: No positions

Roth IRA (non-taxable, no contributions)

Cash is 83%, as I will not go whole hog for the seasonal when cash is still paying me to avoid risk. That said, I will be prepared to reduce cash, especially if gold stocks make a move (GDX takes out the neckline at 30 and loads a target of 40). Meanwhile, I took the profit on ENTG and seeded that into AMAT. That’s how I’ll plan to do it. Make sure I do some selling where appropriate and if/as the seasonal progresses, re-seed elsewhere on opportunity.

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.