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Another abbreviated report to close out 2023

2024

2022 was a bear market that (in my opinion) wasn’t. It was a firm correction to the ongoing bull market in stocks.

2023 was the correction to that correction, which as we noted a year ago was unsustainable from an over-bearish sentiment point of view. It was aided by the mid-term election cycle and of course the anticipated disinflationary Goldilocks phase that came as if on cue (and stayed longer, through 2023, than originally anticipated).

2024 begins with those projections having become trends and with man, woman, machine, HFT, Ma, Pa and casino patrons of all stripes hopping on board the disinflationary Good Ship Lollipop as it sails the calm waters of 2023 right into the first day of 2024.

But today the dynamics are different, which is an understatement. The mid-term election cycle is done, everybody now knows the Fed plans to cut rates by spring time and sentiment, especially, is opposite to a year ago. Here is the situation as of last Thursday as presented in this public article illustrating more about the macro setup for 2024.

SPX is the last holdout of the major US indexes hitting new all-time highs. It’s objective for that status is to get above 4819. At 4793 to close 2023 it appears destined for that. It is also overbought with gaps aplenty to the downside. But let us not over react to that. Let us just be aware that the market’s risk profile sucks, whereas a year ago it was opposite, with a positive risk/reward profile.

• At this time last year market sentiment was bleak. I recall it clearly because I was trying to birth a contrary bullish point of view, but the Q4, 2022 October low was not confirmed until the 50 and 200 day moving averages Golden Crossed, took the obligatory plunge in response, and then moved above and turned the moving averages up in Q1, 2023.
• Let me summarize. The market is fully trending up, is completely bullish, technically, is adding weight in the form of improving breadth beneath the surface, the Fed is softening as the bond market firms (on cue, I might add)… and sentiment is polar opposite to a year ago when the bull move began.
• Over in indicator land, the article linked above reviews the yield curve situation, which is still inverted but also still steepening from inversion. The NFTRH view is that it is going to de-invert in H1, 2024 and maybe get players excited like ‘Yay! The YC is no longer inverted, happy days are here again!’, except that it tends to be the steepening, not the inversion trumpeted in the media, that brings the pressure (inflationary and/or deflationary) on the economy and markets.
• Then there is the negative divergence of the 2 year Treasury yield to the Fed Funds proxy 3 month T-bill yield. It has been ongoing for the better part of a year now and referencing the 2000 and 2007 market tops that is long enough to be flashing danger signals. The vertical blue lines show the beginnings of the divergences, and the red lines in the previous two bear market cases show when the signals became very late stage as the T-bill (Fed proxy) finally caught on. Today the Fed is whispering dovish. Probably because they know that the T-bill is likely to roll over.

• As always, timing is at issue (the market could top on Tuesday or it could drag on for months). Also, it’s possible that I am mistaken in my current view that is opposite of last year. But the sentiment profile and the indicators argue that the current view is not wrong.
• The strategy is not to be touting bearish as the trends are obviously up and by definition in a bull market. Maybe it would be too perfect for SPX to put in a massive double top (possible even from marginal new high) and tank with the gathering indicators and bloated sentiment profile. The strategy is to understand what is in play from a risk/reward standpoint. What is in play, in my opinion, is danger for 2024.
• That danger could come after said double top or even after a hysterical FOMO-driven upside surge and reversal (e.g. Nasdaq 2000 and Silver 2011).
• There was an extended Goldilocks environment from 2013 to 2018 as stocks rose with a mainly firm US dollar led by, yup you guessed it, Semi and Tech. One difference between then and now aside from the currently questionable USD, is that the 2yr yield was just starting to emerge from the deflationary signaling of the ZIRP years while Bernanke kept the Fed Funds rate pinned at zero.
• In my opinion, Bernanke leveraged global deflationary signaling to work his inflationary magic. A real “hero” <sarcasm, if it’s not obvious>.
• Today the structure of yields is much different, having already apparently topped. The 2000 and 2007 instances above resolved into bear markets.
• The 2024 instance does not necessarily have to resolve that way, but our original plan was for Goldilocks relief followed by uncomfortably disinflationary pressure (i.e. deflation scare), declining yields and, if it holds to historical precedent, declining stock markets.
• So I ask you, if the plan was established a year ago and is still completely on track to this day should we change the plan just because the bullish process is still unfolding?
• That would be a hard NO.

US Dollar

USD is on a little bounce as per the projection in this NFTRH+ update on Dec. 28th. From the update:

As for a bounce objective, resistance at 102.50 looks like a reasonable level.

Still in very minor bounce mode, that looks doable. Perhaps it could come about with a little market volatility to open 2024.

But with USD trending down from the bull trap high and implied support from Fed policy being at least temporarily withdrawn, a bearish stock market view is no sure thing, at least not without a real fight. We periodically review this chart showing the inverse relationship of global stocks (ex-US) to the USD, but take a look here at how anti-USD the S&P 500 has been since the summer.

The implications are…

• If USD resumes bearish as is its intermediate trend, an actively bearish stock market stance will have much risk of punishment on the way to one day being the right stance.
• If/when USD bottoms and turns up it would not be at the hands of a hawkish Fed, which has been the primary beneficiary since 2021. It would be in tandem with a market liquidity crisis and deflation scare (ref. Q4, 2008 for example).
• All of the above are in line with our wider macro view, which has been Goldilocks relief (complete with Fed relief) to convince 2022’s bear refugees to ‘come on in, the water’s fine!’ before springing a bear trap.
• Speaking personally, I do not have the wherewithal to go all ‘Big Short Michael Burry’ and fight the market. As I recall, this symbolic bearish icon was compelled to cover a much publicized short on SPY by the 2023 bull cycle. That’s one hell of a cycle and one hell of a sentiment signal. FOMO, baby!

Precious Metals

This chart of GDX shows a minor pullback as USD puts on a minor bounce. One day an impulsively rising US dollar (liquidity crisis) would theoretically be the gold miners’ best fundamental friend because what would drive USD up would also drive gold up vs. most markets, including those that drive gold mining costs. In other words, the opposite of the inflation that too many bugs believe to be a valid fundamental, would drive the miners’ fundamentals.

So we continue to look for a deflation scare to ramp the miners’ fundamentals. Look no further than the microcosm of Q4, 2008 when gold rammed higher vs. commodities (including mining cost driver crude oil/energy) and stocks. The gold miners were the first to bottom in that epic phase. Then they eventually became fundamentally compromised as the Fed brewed up new and extended inflationary policies through bond market manipulation.

Our next upside objective is the 33-34 zone, which is clear resistance as shown by this extended version of the chart. The ultimate rally objective extends as high as the gap at 40+. Should GDX fail the 30 (+/-) support area that includes the 50 and 200 day moving averages, something else would be in play. That would likely mean the broad bull’s end is coming sooner rather than later as well. But above support and the moving averages we remain on the 33-34 objective.

• It is nice to have clear parameters to work by as noted in the paragraph above. If GDX were to fail, the good news would be that the longer-term buying opportunity would come sooner rather than later.
• If GDX proceeds to upside objectives like 33-34 and 40+ I’d still view that as a figurative if not literal ‘sell’ (there are those slowly accumulating the whole process, after all). That sell would in our hazy crystal ball be when the broad markets top and turn down.
• As for gold and silver, the seasonal is turning positive again and if current plans hold true we’re looking for gold to firmly establish new all-time highs (and then some), and silver to target the 35 area.
• Then, if a market liquidity event formulates in 2024 as anticipated gold would pull back enough to perhaps test its blue sky breakout. From what upside level? Let’s measure a target range of 2200 to 2300 based on the 2020 to 2023 pattern gold would have broken upward from. Longer-term, the target for gold is 3000+.
• Silver is a wild card and beyond the target at 35 I am not going to hazard a guess at this time. It’s downside would be more considerable than gold’s in a liquidity event.

Bottom Line

The macro is aligning positive for gold and especially the gold stocks that leverage it. But the miners are not currently unique, other than as an also-ran component of what I think are the final stages of the broader bull. The real buying opportunity could engage at whatever low comes about if/as the miners get pulled down with a broad liquidity event… even as their fundamentals improve wildly. Again, ref. Q4, 2008 for a microcosm of this process.

NFTRH is no guru-wannabe prediction maker at New Years. So if the admittedly complex view above needs alteration/revision or even a little tweaking, that is what we will do as we enter 2024. No gurus here. Just people who want to stay aligned with the markets by doing and showing their work on daily, weekly and monthly bases.

Commodities

• CRB turned down with the little USD bounce. It is and has been trending down from the 2022 high in what could ultimately still turn out to be a bullish flag. But a deflationary liquidity crisis would obviously compromise that view.
• We should, however, stay open minded about inflation in 2024. Yes, the view is currently for disinflation to morph to something worse. But the other side of the macro coin is the von Mises inflationary Crack-Up-Boom.
• Long-term Treasury yields have, after all, dropped a long way already. If they were to find support and rise it would likely coincide with renewed inflationary pressure.
• WTI oil is trying to bottom at support in the mid-60s (current price: 71.65). It is driving CRB. NatGas broke down from its base and I’d be interested if not for the seasonal, which is not positive on average, turning down in December into February. Then it bottoms and ramps upward into June. Gas already turned down at the start of November, so maybe it is ahead for schedule for a bottom. My main watch item for that is AR. As for Energy in general, I am watching XLE, several of its components and old standby, NOG.
• Copper and its miners also got dinged with the USD pop. They are expected to remain contrary to the buck as well. Ditto general industrial metals.
• The Ag index (GKX) is trending down and the uptrending ETF (DBA) got clubbed as the buck bounced. I still hold CORN and will keep an eye on a MOS here, and an NTR there.
• The Uranium sector is laboring along its nominal intermediate uptrend, but is underperforming the Sprott Uranium trust (SRUUF), which itself is trading at a discount to spot u3o8. Not sure what it means but I don’t want to sell it (URNM) as it does the seemingly healthy thing in staying grounded. I’ll continue to use the SMA 50 as the caution tolerance on URNM. The negative interpretation of this chart is that the sector is going to fail. The positive interpretation is that the sector’s story has not yet been played with mainstream investment entities still playing in their stock market sandbox.

• I took profits on commodity related items like MP and ARREF as the USD firmed a bit. But the list of items, including those two and a host of metals/materials/energy related items continue to be on watch in the case of a resumption of the USD downtrend.

Wrap Up

I have gone on longer than intended and as such, there is no portfolio segment, but there is a simple wish from me to you for a healthy, happy and prosperous New Year!

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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.