Summary
US Stock Market (2 weeks ago): Seasonal remains positive. Trends are up. Gaps are below. Given the sentiment note below, risk to this rally – or at least the risk of an interim pullback – has increased markedly. In other words, even if the seasonal rally is to continue (favored), a better opportunity (than at current levels) to buy it could be ahead. 2 weeks ago: Or the darn thing could just accelerate into termination with the “soft landing” tout gaining more airplay. Last week: No change.
THIS WEEK: Still no change. A speculative excess could be brewing. We also introduce a new wrinkle with a thought exercise about the inverse of the 2018 Christmas Eve massacre (and reversal).
US Market Sentiment (as per last 2 weeks): Over-bullish sentiment is becoming dangerously over-bullish sentiment.
Indicators: Some indicate building danger and others indicate still intact speculation. It is a dangerous environment that will terminate at some point. But guessing about and fighting the timing of it could prove dangerous as well.
Fiscal Inflation View (as per recent weeks): In my view, this comes later. Perhaps at the trigger of a deflation scare.
Global Stock Markets: USD broke down on the weakening Fed and Global rallied. No surprise there. Segment shows charts for review of various market trends.
Precious Metals: The Fed weakened amid the disinflation signals we’ve been noting all year. This is to the script of a bullish view on gold mining, which would leverage gold’s standing in the future macro amid economic deceleration. This leverage would work regardless of whether gold runs well nominally. As long as it is moving strongly upward vs. commodities and stocks, that’ll do the macro fundamental trick for the miners. Gold is moving vs. commodities but not yet stocks, during the seasonal party.
The best view at this time is for a strong rally now but a ‘sell’ if the miners do bull hard with bullish cyclical markets, as they currently are. If the miners get all that bull sponsorship into an improper macro they’ll be vulnerable to a broad market top and correction/bear. So the preferred plan is for the real investment phase to come after such an event. If, however, the miners somehow flop here and do not participate in the short-term with the broads, I’d have more conviction that they would not need to drop with the currently bubbling broads.
Commodities: CRB index is not and has not been bullish. Still, the segment discusses several prospects in the commodity complex, including crude oil, which has been as bad as CRB. Various commodity/resources related stocks are playing to the tax loss seasonal bounce script. See segment.
Currencies (last week): USD got a supposed Goldilocks payrolls report last week. November payrolls were supported by returning auto workers, embedded Healthcare and even more entrenched government. Not healthy stuff beneath the surface. But it’s party season, so who cares (yet)? We have allowance for USD to bounce to its SMA 50 above 105. But if the market interprets b/s on the jobs report sooner rather than later, it can resume its decline. Longer-term, USD in conjunction with the Gold/Silver ratio would likely rally when the big policy bubble driven stock market bull tops out.
NEW: Of course the November payrolls were a red herring. FOMC came along, the Fed is finally factoring the 2023 disinflation and easing economy and USD lost its supposed underpinning of November payrolls. USD has every reason to decline now. Except one. That one would be when the broad party is ready to liquidate and USD, the reserve currency, gets a liquidity bid.
US Stock Market Sentiment, Technicals and Indicators
Amid grossly over-bullish dumb money sentiment, the seasonal market rally continues. Interestingly, smart indicators turned up a bit, possibly signaling that the seasonal has more room to run. Remember, sentiment is a condition, not a timer. So dumb money can feel like it is doing the right thing for a while yet. Also, check out the medium-term risk for stocks. That implies that the next top will be a significant one, like a bear market, in my opinion.
- NAAIM (Investment Managers Survey): ‘Only’ 78% bullish, but the reading was not inclusive of the post-FOMC joy fest. They likely chased the market during the post-FOMC period.
- Investors Intelligence (Newsletter Survey): Also prior to FOMC (12/12), at 2.87 bull/bear ratio II was zooming back toward over-bullish levels of last summer just over 3, unable to maintain their moderate stance any longer. Post-FOMC likely saw more upside, potentially into extreme territory.
- AAII (Ma & Pa): At 2.66 bull/bear ratio the reading is also at the highs of last summer as of 12/14.
I assume all that volume on Friday had something to do with Op/Ex. It happened on other indexes as well. SPX (daily) is very overbought by RSI, although MACD is just recently triggering up again. This has the potential for animal spirits to pound out a real blow off spike.
Work with me know… do you remember the Christmas Eve Massacre of 2018? What if the market were to setup a reverse of that event?
On that day it felt like just myself and a bunch of machines were on the market while most participants were at early mass or half in the bag at their respective holiday gatherings. It felt like shooting fish in a barrel that day; a hard spike down to finish the correction and then immediate upside reversal into the next bull leg on the next trading day. I remember adding Google and a couple other bull stocks on that plunge. To be sure, such a (reverse) scenario would be an outlier, but part of my job is “if you see something, say something”. So I said something.
So I am thinking about the odds of the opposite happening. An upward spike is in progress and everybody, including your letter writer, seems to know that the market is bullish and the seasonal will extend into and possibly through January. The 2018 event came at a time when the Fed was holding firm in its tight monetary policy, then president Trump was berating Jerome Powell, demanding lower interest rates and the market eventually turned upward of its own sold-out volition.
Today something opposite is happening in policy as well. Last week the market celebrated the softening Fed. Happy days are here again! Soft landing days are here again. Just ask Doctor Ed…
Seriously, this is an intelligent man with a great website full of useful market data. But at this juncture you can add Doctor Ed to the growing list of people and entities expecting the fabled “soft landing”. I continue not to expect that. Indeed, my little 2018 thought exercise above prompts me to be aware that an upside blow off – if that is what is in play – can extinguish at any time. It is under no obligation to play to the script of the average seasonal. Christmas Eve? Probably not. But possibly nearer-term than previously expected, which has been out into 2024, possibly half way through it.
Speaking of Dr. Ed, let’s take a look at a couple of graphs from his website. Fed Funds Futures are rolling over, as we know.
Fed Funds tend to rise either into or just before recessions. Since 2000 the tendency has been for the FFR to rise and then level off before a recession begins. Last week the Fed fell in line with the ‘level off and then rate cuts by spring’ theme. The Goldilocks backdrop will last as long as it lasts. Could be Christmas Eve, could be next spring. But the signal is for an oncoming recession, which is no soft landing. Note how the last several recessions did not begin until the Fed had begun actively cutting rates. That argues for spring time frame for a recession to be officially recognized.
Meanwhile, you can see that the Fed appeared to really mean business on this tightening cycle.
The above can be filed under the same category as formerly firm ‘real’ Treasury yields, which had implied a very tight and fiscally sound Fed, but are now dropping with the release of hawkish pressure in the markets.
Please understand that I am not an economist or a banker. I am a market manager putting pieces together. NFTRH subscriber, former investment banking professional and Austrian economics analyst Michael Pollaro provided this view into how QT may not be so QT to this point.
Michael has a whole data pack of information about True Money Supply, the Fed’s internal operations and other aspects of our remotely controlled financialized economy (my words, not his). I’ve invited him to do a guest post at the website, should he so wish.
For decades it’s been a game of inflationary ‘hide the cheese’ and it is doubtful that the Fed really has turned over a new leaf and will not try to inflate the system once again when the next crisis hits. The issue is that with the 30 year yield Continuum and other indicators having broken in 2022, one wonders if the results of any future inflationary operations will be as palatable to the mainstream as they have been for the last 23 years.
Here is the yield tanking back to the original pattern target of 4%. If it were a stock chart it would be a normal test of support. Thus far, the disinflationary signal is being well received, even cheered as the indicator of a soft economic landing. But our theme is that if it falls far enough, at some point comfort and relief from the evils of inflation will morph to fear of deflation. At what level does that sentiment shift start to take place? 3.5%? 3%?
If the Fed were to panic inflationary at 3% that’s a lot higher than the near 0% it panicked from in 2020. One implication is that the bond market is saturated with inflation. Think of it this way, where once the Fed had a dry sponge with which to soak up liquidity, today they have an already soggy sponge that will not hold as much liquidity. Please re-read this paragraph if you’d care to.
Today the Fed is backing off of fighting the last war and the mainstream is celebrating that victory with sweet holiday treats of soft landing hype. So be it, for now.
Speculation is building, and this is in keeping with the upside blow off scenario. Again for reference, a striking example was silver in spring, 2011.
Check this out; XLY/XLP (more speculative Discretionary vs. more defensive Staples) gapped down into the 2022 mini bear market. Last week it gapped up into whatever market upside is still ahead. It implies emotion and today that emotion is over-bullish and building toward dangerous.
Let’s look at some weekly charts, beginning with the SOX > NDX > SPX leadership chain and including here a look at two cyclical ‘reflation’ sectors, Energy and Materials. In keeping with the Goldilocks theme of the last year, Semi has led Tech, which has led the broad SPX, which includes an array of sectors, including Energy and Materials. The theme lives on, but that does not mean the reflation stuff – along with commodities and resources – will not participate. But the leadership is in Semi and Tech. Period.
A look at weekly index ETFs and various sectors for your reference. SPX tracker SPY is ticking a new high for the cycle and the view has been to allow for a new all-time high that the ‘soft landers’ can tout far and wide to bring in (FOMO) any remaining holdouts from the supposed bear market of 2022.
Energy is in downward consolidation within an intact uptrend. I am still interested in the sector. Industrials are bulling along an uptrend, Financials are attempting to establish an uptrend, Materials are bull-biased and Real Estate could play some real catch-up here, given the declining interest rate backdrop.
Meanwhile, Tech and Semi continue to power along. Communications services (a diverse segment) is trending firmly up, Cloud is breaking upward from a nice base, defensive Staples do not look good good in this speculative atmosphere and Discretionary does. Logical.
Defensive Healthcare is flat lining, which is also logical to the speculative backdrop and 3 of its key components are market laggards to varying degrees. When the market starts to get notions of risk ‘off’, H/C should start to rise in relation to broad SPX. No sign of that yet, but it will surely be kept on radar.
Meanwhile, forlorn Clark is my way of saying that old fashioned Dow Theory practitioners are glum about the markets (negative Dow Theory signals) and celebratory Clark means that the mature, refined gentlemen in ascots are toasting the market’s positive signals with a glass of fine cognac. Nominal IYT is fine technically, and in Dow Theory the Transports have made a catch up spike to the Dow.
Meanwhile, defensive Utilities are trending down. I’d expect that to change with a combination of less yield income competition from Treasury bonds and future risk ‘off’ inclinations by market participants.
Currencies
The US Dollar index (daily) made a bounce on Friday, halting at a minor resistance area. This after its breakdown on the dovish Fed news. It can stop bouncing here and reignite the party, it can bounce back to the SMA 200 at 103.50 and put a little pain in before the party resumes. Or at any such time as a reverse Christmas Eve Massacre might occur (just a very preliminary ‘what if?’ at this time), it could plunge and reverse upward in a liquidity event.
The reserve currency is subject to much macro noise. In the last week we saw it use a questionable payrolls report with a positive headline to initiate a bounce and then a weakening Fed to initiate a failure of that bounce. Noise, baby. That’s what drives the daily events in markets. But the trend in USD appears to be turning down (SMA 200 at 103.50 is the arbiter) along with the policy that had supported it. The wildcard would be a future liquidity event, which would drive USD upward (along with gold vs. silver).
Yet the Gold/Silver ratio (weekly) is giving no clue just yet. It eased last week, which makes sense with the risk ‘on’ market relief that took place. If the GSR breaks the triangle upward, it could get uncomfortable quickly. If it breaks down, well, party on Garth.
Bitcoin got clubbed one day last week, but it’s technicals are fully intact to a bullish trend from September. In ratio to gold it continues to imply a speculative backdrop in place on the macro.
Meanwhile, gold is moderately trending up vs. global currencies (daily chart). Considering that it is attempting to start an uptrend vs. USD, gold could gain a universally positive view in 2024.
Global 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.
Again, the living proof that global stocks (ex-US) have been very anti-USD for some time now (actually, since H1, 2021). I don’t see much reason for the inverse correlation not to continue.
The World (ex-US) is enjoying the weak US dollar, as we knew if would if USD were to drop. Europe appears to be a primary driver of the world as its status is very similar. UK is on a 2 month long rally and Canada’s TSX and Australia’s AORD are each trying to establish new uptrends.
Japanese Nikkei is flagging but holding its uptrend while Hong Kong is bouncing but holding its downtrend. As usual, the China large caps ETF (FXI, not shown) is doing what Hong Kong is doing.
India… wow, you go! EM sees the weak USD and says ‘hey, wait for me!’. Canada’s junior index is painstakingly trying to get with the global anti-USD bounce-a-thon. If it resumes upward there could be some nice tax loss seasonal speculations in small ‘resources’ stocks making nice gains.
Brazil is making a new high for the cycle and actually testing its all-time high (131,200 in 2021). Argentina took a hit on Friday within its raging bull market. Mexico… wasn’t it quite bearish just a month ago? Yes, it was. Now, not so much. Africa ETF bounced within its robo-downtrend and the Frontier fund is trying to rally above the SMA 50 (and SMA 200, not shown) from a decent pattern.
Precious Metals
GDX (daily) is easing to fill Thursday’s gap up, and should hold support at 30 to keep things normal. Sounds familiar, doesn’t it? It never quite filled either of the short-term downside gaps on the most recent drop below support and the SMA 200. But those can wait until later, like when the broad markets enter a bear in 2024 (preferred scenario).
The gold mining fundamental backdrop continues to be in transition as operational fundamentals (e.g. Gold/Oil ratio) are improving nicely while what I call ‘macro’ fundamentals are not, as gold vs. stock markets continues not to beg the mainstream to get on board. The bubble needs to blow out for that to engage.
HUI/Gold ratio appears poised to move upward. At the least, it is still in its bottoming stance and not negatively diverging the sector on the short-term.
Here is an interesting one. Gold vs. an ‘inflation expectations’ gauge did the logical thing and turned back up last week as disinflation continues and becomes more widely accepted by casino patrons. HUI is lagging, and that is just fine, assuming that it will follow the indicator as it has been doing.
The monthly big picture view of HUI shows the index still stuck at resistance. I think it is coiling and ready to break through. If that view is correct we are looking for the 300 area and the top of the downtrend channel as the next objective.
For perspective, a monthly log scale chart of HUI showing the intact trend line from 2000. It’s a low priority picture, but a constructive one nonetheless to view every so often.
Gold (daily) is well below the spike level of a couple weeks earlier. The subsequent drop filled a gap and now it is easing to fill last week’s gap up. Normal and not at all overbought.
Gold monthly log scale for reference. It’s just a bullish chart.
Silver (daily) spiked and reversed on FOMC day, then it rammed upward after Powell’s sweet dovish nothings. It then logically stalled at resistance. The daily chart is biased bullish.
And the monthly chart reminds us once again that it don’t… well, you know. The silver price is in a constructive pattern lurking below resistance.
Indeed, referring to the weekly chart we previously reviewed for a would-be Inverted H&S pattern, here it is, still potentially in formation. Actually, it looks better now than when it was first shown several weeks ago. RSI and MACD both look ready to go and are not at all overbought. Of course these are the precious metals and we are programmed to think ‘what could go wrong?’, but I am a TA and I see a pattern that I like. A lot.
I added and increased the Sprott Au & Ag bullion fund to have gold’s stability and silver’s potential giddy-up. Here is CEF’s monthly chart showing a bullish situation laying in wait, with RSI and MACD positive and a discount to NAV of 4.7%.
Other odds and ends…
- BPGDM is elevating but still not excessive (i.e. not overbought).
- Gold and Silver Commitments of Traders are as we left them; not contrary bullish but also not at show stopper levels. The CoT become less contrary positive as the metals rally, by definition. It’s how the market works.
- As we’ve been noting lately, the seasonal for gold turns positive again now, in mid-December and runs through most of February.
- The silver seasonal makes a short-term low in late December and turns up hard in January, running through February, pulling back and making a higher high in April before beginning a decline into July.
- Take the GDX seasonal with a grain of salt because the ETF was introduced in 2006 and has been in a bear market and a very VERY volatile bull market (beginning in 2016) for a majority of that span. Also during that span, the macro fundamentals have been negative much more often than not for all the reasons belabored to this point. So here is the limited seasonal history of GDX. It bottoms now and with a little volatility makes a very nice high in February before chopping up and down to a July high that – if seasonals were like clockwork – would be a ‘sell’ every year. But for now, my interest is in the next few months as I do expect to have to manage risk when the broad market gets hit.
The Portfolio segment will discuss individual gold stocks as well as other broader items I hold or have on watch. It’s party time, baby! Unless that 2018 reverse symmetry exercise in the US Stock Market segment actually comes about.
If the broads take a hit but the precious metals have not yet really gotten going, I’d give them decent odds to rally as the broads get hammered. If on the other hand the precious metals have been overtly bulling hard at the broad market’s top, I’d have an abundance of caution on them as well.
Commodities
Palladium popped hard but I never re-bought it after the first trade. Anyone interested might watch to see what it does here at resistance or the downtrending SMA 200. A preferred buy area is now at short-term support shown at 1100.
Here is the daily chart of the ETF zonking resistance. A pullback to fill the upper gap would be a reasonable entry for a Pd bull. For reference, here is the original NFTRH+ update (November 10th) noting that Pd had hit the long awaited long-term support zone.
Platinum halted at its SMA 200 and is less short-term overbought than Pd above. A Pt bull would buy this support test and manage risk if support is lost. RSI and MACD are positive, not overbought and looking good.
I ended up adding CORN per this NFTRH+ update‘s rationale. Here is the weekly chart still nesting on support.
CRB index and its driver, crude oil are not doing well. I hold USO as a seasonal spec on oil per this NFTRH+ update on December 10. As noted last week, I am also watching the Energy sector (XLE and components) for a potential reversal of recent fortunes.
Copper (weekly) is still looking bullish above the nose of the Triangle. A seasonal shot to 4.20 appears doable, all other things being equal. Yet I did not position in the miners. ERO was the one I wanted and I had a busy week and it got away from me. But this macro is not just a copper thing. It’s a macro thing and it’s a seasonal thing. I have plenty of other items of interest.
Speaking of which, US Rare Earths producer MP is so far holding the support area noted in NFTRH 786, along with the 2020-2023 price performance of various RE materials. The premise was how far MP’s stock price has declined vs. how far REE prices have NOT declined.
The Uraniums are laboring along in uptrends, with UUUU looking suspect I assume for some UUUU-specific reason, which I have not looked into. I simply continue to hold URNM pending the 50 day moving average and its uptrend. If it were to do something like what UUUU did, I’d probably sell it.
Here is the daily chart of commodity related stocks playing to the seasonal bounce theme we’ve been watching for. As noted, I hold MP and as mentioned recently I have no particular interest in the Lithiums, other than as casual watch items. But there they go anyway. SBSW could be a useful play on the PGMs, but I am still inclined to buy Pd and/or Pt directly. But SBSW is on casual watch as well.
Portfolios
Savings balanced by gold
Trading Account: No positions
Roth IRA (non-taxable, no contributions)
Cash is down to 74% with no short or hedge positions. With a view that the market is both bullish and terminal, 74% represents me being in the game, casino patron style. In other words, cash is low. I am aware that for the foreseeable future cash will be spitting out a nice gain every month. But also that at some point the Fed will start to cheapen money again and follow the bond market toward reducing interest rates. Hence, I’ve added 1-3yr Treasury bond fund SHY to the short-term bond held directly.
I have tried to assemble the portfolio with the above-noted Semi > Tech > Broad leadership chain in mind. But also, I think that more commodity/resources related items may be traded in the window of the next few weeks/months.
As for the gold miners, they continue to be a special interest, and not because I’ve been clicking the heels of my ruby slippers since 2012, but because the macro is slowly aligning positive (with more work to do). Right now they are anti-USD like a lot of other items and with the Fed weakening gold bugs should ask “why not us?”. Aside from favored miners and tax seasonal specs listed below I have an eye on usual suspects like GOLD, NEM, RGLD, WPM, NGD and BTG. The plan continues to be to ride a potentially dynamic seasonal rally along with the broad markets and then ‘sell’ the miners into a coming market top. It’s just the preferred plan and it is of course subject to alteration along the way.
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.
