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Summary

US Stock Market: Bullish and at high risk. No change there.

US Market Sentiment: Still firmly over-bullish, if not epic extremely so. Last week’s condition for a top resulted in a little pullback. Nothing more as yet.

Market Indicators: A combination of high danger (e.g. 2yr yield divergence to the Fed Funds/T-bill) and sound asleep indicators (e.g. High Yield Spreads, VIX, still lofty money supply, Libor/T-bill spreads, etc.) meaning two things: Still risk ‘on’ and bullish and still high risk (by definition).

Global Markets: Still bulling along. Segment below briefly reviews several markets individually.

Precious Metals: The sector has come to be pretty well hated, at worst or ignored, at best. Much more exciting games in town. It pays not to think like a casino patron (psst: that is exactly what many bugs are) and instead think like a patient macro manager. Because when the macro flips, I think the gold miners are going to be epic. But that time is not yet. Even though gold is bullish, it’s ratios to risk ‘on’ stock markets indicate a heavy lid on the sector. Meanwhile, the miners held and turned positive on Friday after we noted in an update that GDX had filled a gap. It’s something, I guess. If a rally is starting it would still be indicated to not be backed by the proper macro funda.

Commodities: Laying in wait for a weak USD and Gold/Silver ratio combo. That’s pretty much the story. A pullback in long-term bond yields would probably help as well. Traditionally commodities are positively correlated to rising inflation expectations and hence, yields. But on the cycle that began in 2022, that has not been the case as the markets respect/fear every utterance out of the central planning agency’s orifice.

US dollar & Gold/Silver Ratio: USD (DXY) is in an intermediate uptrend but not necessarily bullish on a daily chart. As long as that uptrend is in force it should be respected. Bigger picture, keep in mind that USD did test significant long-term support on the correction from the 2022 high. That could be a floor. GSR is gently rising, which, considering the moderately rising USD, supports Goldilocks. If these two break down along with Treasury yields it would help the inflation trades. If not, it would continue to keep a lid on them. If USD and GSR get upside impulsive, everyone out of the pool, figuratively at least.

US Stock Market, Supportive Policy and Sentiment

“In need of a correction”… of course it was. All the elements were in place, but the result was a blip, a little pullback before happy AI news drove the machines, which in turn drove the indexes to new highs.

And so the bull market goes. Our original thesis evolved (changed, morphed…) as follows:

1. The supposed bear market of 2022 would see an upward correction off the unsustainable sentiment lows of Q4, 2022.
2. The rally projection was through Q1, 2023 but this was obviously way too conservative, time-wise.
3. We were anticipating a test of the previous highs and the potential for a double top (with slight upside throw-over potential to generate “New All-Time Highs!” type headlines.
4. We got those, but the persistence of the rally negated the ‘double top’ scenario in favor of an upside and possibly manic drive. Affixing my tin foil hat, the US presidential election came to the fore with the view that of course government is in the game, working with the Fed. Government? Yes, Yellen. Chief economic cheerleader of the Biden admin and former Fed chief. Do you think maybe she has Jerome Powell’s ear as he works the levers by playing hawk out of one orifice and dumping the cheese out of the other?

Sorry for the disturbing imagery, but cheese is another way of saying market sustaining liquidity. “Higher for longer” on the Fed Funds rate is the buzz phrase of the still-hawkish Fed. But the mechanics behind the curtain imply that the Fed is indeed trying to engineer a soft landing, if not a ‘no landing’ of the economy. Reference Michael Pollaro’s view of net positive liquidity…

When is the Fed hawkish and not hawkish? When it raises/holds the Fed Funds rate and when it releases money supply pressure through other more clandestine operations. That’s a lot of knobs and levers he’s pulling behind that curtain.

As for money supply, M2 is levitating after not nearly mopping up the excesses created by the Fed in 2020. Not nearly!

Here is the the ‘change from a year ago’ view. Aside from the ZIRP years where the Fed overtly stabilized and maintained liquidity, rises in M2’s rate of change have preceded recessions. The recent rise in ROC toward positive matches Michael’s view above of stable monetization.

You could say that it’s a game of ‘hide the cheese’. One orifice hawkish and the other, sensitive to the needs of administration for which former Fed chief Yellen works, is benevolent.

These are some of the mechanics of why we’ve pivoted to a view that continues to include our high risk indicators, but is also “still bullish” just as I would assume the Government (with its string of excessive hiring, the Semi CHIPS Act and whatever ‘Green’ initiatives it may still have in its hip pocket) and Fed (with the mealy mouthed hawkish-lite routine as illustrated above) would like.

The question continues to be, can this edifice be carried and sustained into the election? So far, so good boyz and girlz. The Good Ship Lollipop sails on with clear indicators showing that those in power are doing well so far behind the curtain. In order to play the game with the house’s rules (holding cash does not count), you have to take on risk. Period. Risk in the form of…

• High Yield Spreads completely burrowed southward without a care in the world by speculators.
• VIX planted to the floor, although on a concerning positive divergence to the stock rally.
• Sentiment excessive but not epically so, including Dumb Money indicators, Investors Intelligence, AAII and NAAIM).
• Market breadth is a serious issue unless you own the mega caps driving the indexes. After that it’s hit or miss. Lesser stocks are getting spiked or hammered at earnings. I don’t think I’ve seen a single neutral reaction post-earnings in any stock I’ve followed. Anyway, Equal Weight SPX (RSP) continues to trend purely down in relation to headline SPX, which is weighted to the big stuff. If the breadth laggards like small caps play catch up (another breadth thrust as per Q4, 2023) the next stages of the party could be dynamic. If they fail to bull, the divergence would become more concerning still. Let’s not discount a big bull party. Risk not yet realized can be dynamically bullish, given the MOMO/FOMO in play.
• Yield Curves steepening (negative) but sill inverted (interim still beneficial).
• 2yr Treasury yield divergence to the Fed Funds proxy 3mo. T-bill yield. This is a slow mover and a bearish omen, based on history.

The bottom line is that risk is high, has been high and will continue to be as long as the above are in play. But risk, like sentiment, is no timer. The ongoing question – one that I am not going to test with much risk to my capital (bullish or bearish) is can our policy heroes carry it across the finish line (election)?

Meanwhile, the Semiconductor (SOX) > Tech (NDX) > Broad (SPX) leadership chain is still completely intact and defensive signals like Healthcare (XLV)/Broad (SPY) ratio are still trending down (beneficial to markets).

So I’ll leave you with our general picture (daily chart) of the 3 bullish indexes…

…and the larger, slower moving macro view of SPX per the 2yr/T-bill divergence.

This last chart now reflects the transition from what I had questioned may be a ‘bull trap’ higher high and double top to a new rally leg, risk and all. This is the other side of the coin; the side implying that maybe they can get this pig to the finish line amid a ‘Nasdaq 2000’ style blow off. Could happen, could fail. Right now it is on track to happen. Speculate accordingly if you choose to.

Sectors of Interest in a Market Subject to Potential Rotation

• Tech and Growth stocks continue to lead. I continue to sell the upside momos (or the loss makers) and try to pick out some pullbacks or bottom feeds within the Cloud Security, SaaS space. Some of this is the Cathie Wood stuff that prefers a Goldilocks macro, which is what I believe TEAM Fed/Gov are aiming for in the election. Last week PANW, a more hardware related security stock, got hammered and that pulled all the Cloud Security stuff down as well, including my TENB position, which I still hold. As well, OKTA was added on that pullback while I did not have my eye on former holding CRWD, or I might have added it as well.
• Biotech is interesting as the ETF (IBB) is breaking upward from a flag on the daily chart. This sector has lagged and could get a rotation, especially if long-term yields continue to pull back.
• As has been the case for a year now, Semiconductors are of interest. But too many of them have gotten on the momo, compelling me to take all profits and then bottom feed AEHR again (thus far a failure… again), old warhorse INTC. I’ll keep a casual eye out for opportunities, but I think there are better sectors at this point. Semi is ground zero for momo as it features NVDA and SMCI, among other sexy stars.
• Interestingly, Materials (XLB) is in a similar formation to the DJIA/DIA that we had noted last year. This is cyclical stuff and one of our themes is that if the Fed and Admin are able to pull off a continued bullish situation into the election, why not more cyclical stuff joining in? My main watch item had been CBT, but it blasted off on earnings and I did not chase it. I may add the sector, however. I like the chart, just as I liked the Dow’s chart back in ’23. XLB’s theoretical measured target is approximately 104.

As a side note, I originally found US based Rare Earth Elements producer MP when combing through XLB’s components. I no longer see it listed among those components, but it is still primary on my watch list for when I want to try to bottom feed strategic commodities. Here is the list of current XLB holdings.

There are plenty of other sectors that may work and some that may not work or lag. It depends on the macro and the state of the inflation/Goldilocks dynamic. I continue to keep an eye out for certain commodity sectors to find a pullback low or get a rotation. Those include:

• Uranium, which is on a firm pullback. NXE is held and CCJ, UEC, URNM and UUUU are on watch.
• Copper miners, which are obviously cyclical and have a good long-term case. Watching ERO, FCX and SCCO mainly.
• Watching for a potential bottom feed on Lithium producers ALB and ALTM. Just let me get a hint that the Li price can get off the floor and these could be good swing trades, at least.
• Nickel (TLO.TO), Palladium & Platinum (SBSW) are on casual watch for now. But to me, copper looks better.
• Energy sector saw NatGas explode upward on some price rigging by producer CHK. That popped my watch item AR, right out of buy range (for now). Natty is pulling back from that spike. Crude oil is sitting on its daily SMA 200 and needs to hold there to keep a short-term bullish bias. XLE is still decent and I’ve held, but not (yet) added.

Future Unique (counter-cyclical) Sector

Let’s stay on the sector theme by reintroducing the most hated of them all, the gold stock sector. Why on earth would anyone ever want to play here? With Nvidia going to da moon and the US indexes in blue sky, why indeed? But in the markets it ultimately pays if you can buy low and sell high.

Selling stocks at this time is selling high and selling them in few months could be selling them even higher. Buying gold stocks at this time is buying low. Can they be bought even lower? Well, our view is that a rally is still a potential first, but with the macro party it is well and good that gold stocks, despite decent earnings so far, are muted much like the inflation trades they get lumped in with.

We reviewed GDX daily in an update on Friday, and here it is again. Damned if it did not hold after filling the gap and maintain its potential to rally as opposed to testing the October ’23 low or worse, the October ’22 low. I held positions last week and upon noticing it had dropped to fill the ‘permit news’ gap and test support, added RIOFF (RIO.V) as well.

Gold’s daily chart remains bull biased on the short-term as it rides the 50 day moving average.

Silver’s daily chart remains technically neutral with a bearish bias, but its big picture potential is intact.

Sentiment is contrary positive as a relative few have interest in gold amid the risk ‘on’ party going on in headline stocks and indexes. Gold is the anti-bubble, and speaking personally I find that keeping that in mind helps me to not get it mixed up with the speculative macro. Gold, big picture bullish as it is…

…is the ANTI-BUBBLE, after all. When you realize that this metal is not a speculative asset * but is instead, monetary insurance and an anchor in the next financial debt/paper/digital storm, you don’t pressure the ancient hunk of value to be what it is not. It acts as an inflation protector at times, although it is often a relatively poor one, as evidenced by how well stocks have done in the post-2020 inflation phase compared to gold. That is because the inflation worked to cyclical advantage, post-2020 and because the market has implied and full confidence in the Fed to mop up its mess.

And that dynamic naturally carries over to the companies that dig gold out of the ground. So once again let’s review the clear evidence that gold stocks (HUI) should follow gold’s ratio to stocks (SPX). HUI blew the correlation away in the 2004-2008 phase and that bubble was summarily blown up for it the Armageddon ’08 crash.

More recently, we noted in 2020 that HUI had far exceeded the Gold/SPX ratio. It has not gotten blown up for it, but it has endured a correction going on 4 years now. A correction to what I believe is a terribly volatile bull market that began in Q1, 2016. The current excess can be fixed by gold rising in relation to stocks or gold stocks dropping anew to get closer to the ratio. So why again do we make such a big deal about the stock market and its policy bubble fuel? As long as policymakers hold the pig together the macro is not right for gold mining.

* Sadly, all too many gold bugs believe the promotions about gold and China/India buying, BRICS de-dollarization, inflation benefits, war, terror, pestilence and maybe even Doug Casey’s asteroid crashing to earth as reasons to stay perma interested in gold and worse, gold mining. I am perma-interested in [real] gold for the very (decades now) long-term, as insurance and value retention. I am interested in gold miners when the macro is right because when that pivot comes they are going to rip, and rip good as today’s negative leverage to indicators like the Gold/SPX ratio flips to positive leverage. In meantime, it is advisable to tune down the blatant perma-promoters and also the armies of naive but loud dogmatists. In the face of that, frustration and angst are instigated, and do not need to be.

I am keeping in mind the solid contrarian setup developing for gold. Here is a review of the public’s lack of interest in GLD, which is the main tool they would use to buy what they view to be gold. A chart like this could take a while to play out. Or maybe it will not play out as it has on the previous occasions. But history says it will, for some kind of rally at least.

Finally, let’s take a look at the fund that holds both gold and silver bullion from a big picture (monthly) view. While the precious metals have been lame as a play in the speculative casino, the situation shows the fund having made several attempts to break out of the upper line of a symmetrical triangle. Despite this constructive stance the bullion in the fund is trading at a 5% discount. That discount would be warranted, obviously, if CEF breaks down. But to my eye the chart favors an upside breakout, possibly but not necessarily probably pending another decline to the lower triangle line. Much will depend on how long our bubble makers in government and the Fed can keep up speculative bullish appearances. Don’t personalize it. It’s a process.

USD, Gold/Silver Ratio & Global

USD (DXY) took out the December high to turn its short-term rally into a more extended intermediate one. Despite the pullback, that rally is fully intact well above the 50 day moving average (blue). RSI is at a point where if it’s going to turn back up it should soon or it could start to roll over away from its EMA 20 (orange line). MACD is positive but rolling over a bit with a down trigger. The last three times it did this over the last year significant pullbacks ensued.

USD’s partner in the anti-liquidity game is the Gold/Silver ratio (GSR). It is gently rising in a far from impulsive way, so the effect can be pro-Goldilocks but still anti-commodities and if silver will lead them, precious metals too.

USD is also non-impulsive and that too is pro-Goldilocks. We have noted that in a time where every rise in yields is perceived as hawkish fuel for the Fed (again, perceptions, which don’t appear to include the Fed’s internal liquidity promotion per Michael’s chart and the M2 views in the opening segment) the US dollar index has been tracking long-term yields because rising yields implies tightening policy and that is USD’s driver vs. its global fellows.

I hold bond bear TBT as a hedge against yields and USD rising. But the yields wobbled last week and if they turn down the odds that – barring a liquidity crisis sooner rather than later – USD probably would too. That could be the ignition for precious metals, commodities and commodity related equities to gain a rotation. Unfortunately, the process is slow moving just like many other aspects of the 2023-2024 market, which is under no obligation to provide us with answers in a time frame we may find convenient. Meanwhile, we have to play the hand the market deals and keep ongoing perspective on the sloth-like progress of things.

As for global markets…

• Europe (600): Bulling hard and finally dinged its all-time high last week as the US had earlier.
• UK (100): Still going sideways in a pattern that appears to have a positive bias. Technically speaking, UK could be building a platform for some nice upside.
• Canada (TSX & TSX-V) & Australia (AORD): Canada Senior is still well below the all-time high, but is bullish. Canada Junior (da ‘V’) is still grappling at support and the SMA 50, trying to get its modest rally going again. It is thus far a terrible laggard, but is the kind of speculative market that could benefit if USD and the GSR weaken.
• Japan (Nikkei): Last week Nikkei finally surged to test its all-time high from 1990. Those lost decades have been found. This as the Japanese Yen has plumbed depths not seen since 1990! Funny how currency depreciation works, eh?
• India (BSE): Continues bullish as expected, after breaking upward from the consolidation.
• LatAm (LatAm 40): ILF dropped on Friday but is still in a breakout posture from a pattern we noted in an NFTRH+ update several weeks ago. I have it on personal watch.
• Asia (ex-Japan) & EM (EEM): AAXJ is furthering the positive bias noted when I added it to my holdings. So far, so okay. EEM is similar, as they hold some common items. A weakening USD would be helpful here.
• China (large caps & A-Shares): Both the large caps and the A-Shares have made hard spikes upward within still intact downtrends. There is a lot of work to do to eventually change such firm downtrends, but a rally of some kind is in progress.
• Frontiers: FM looks like a buy to this man who stares at charts (and goats). I am putting it in my watch list.

Portfolios

A perma note that funds are balanced by gold (long-term risk management, if you will).

A couple of positions in the savings account.

Roth IRA (non-taxable, no contributions)

Here is the modest group of holdings, mainly in Goldilocks items and gold miners insofar as I am exposed. Energy and Asia are in there and I consider them somewhat anti-USD. If the macro rotates to include commodity/resource producers and prospects, I’ll rotate that way. For now, I am boring and content.

As a side note, I have a small trading account but have not touched it because I have been so immersed in the bigger picture macro. I’d like to at some point make trade or two for fun and hopefully, gain. I won’t list day trader type stuff here. Short of that I am just trudging along to the beat of the not yet pivoting macro.

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.