Summary
US Stock Market: Bullish and at high risk. However, the SOX > NDX > SPX leadership chain remains firmly in place.
US Market Sentiment: Still firmly over-bullish, if not epic extremely so. A condition for a top or a correction is in place.
Market Indicators: If the VIX divergence is going to play out in a market pullback/correction it could happen any time, as VIX dropped to fill the gap (ref. update). Other indicators continue to express a fully risk ‘on’ backdrop with complacency and comfort among investors. That by definition means that risk is high because the pendulum is so far in the bullish direction. The Gold/Silver ratio is still gently trending upward and that favors the macro we have had to this point, Goldilocks who herself favors Growth and Tech.
Global Markets: Still bullish on balance. But EM and Asia continue to make hints toward breaking bullish and the Canadian TSX-V made a new high for the cycle (right to the underside of resistance, which is a key point). Much like TSX-V, China (large caps & A-shares) is trending down but bouncing hard to test the 200 day averages. European stocks are making new highs but are trending down vs. the US S&P 500. Japan is trending up vs. the US, which is quite a feat as even India is not doing so.
Precious Metals: A big bounce on Friday in the miners. That came after a trap door drop and bear trap to re-test the October low. It appears a good rally has the potential to manifest, but the sector would not be unique in that because other items thought of as inflation trades (which gold mining should NOT be though of as) also rammed upward. Gold is bullish on all time frames and silver is best described as intact with potential to bull.
Commodities: With the firm Gold/Silver ratio and USD still on its intermediate uptrend, commodities do not yet have a macro tailwind. The Canadian TSX-V rallied hard on Friday and if it gets follow-through, it would bode well for commodities as well. A potential problem is that the broad market is at high risk even as da ‘V’ probes resistance (and our long standing target area). Watch silver’s performance relative to gold. If silver wrestles leadership from its stuffy old dad, commodities would get that tailwind.
Currencies: As long as USD maintains its intermediate uptrend some caution across the broad markets is advised. However, if it and the GSR start to decline the market could see an internal rotation toward the beaten down stuff in the commodity space. As a side note, BTCUSD has bulled hard and that is an indication of intact speculative sentiment across the markets.
Ponzi Economy 2024
Though the economy is stable and markets are bullish by definition of price trends, the underpinning is anything but healthy.
The U.S. national debt is rising by $1 trillion about every 100 days
Of course, increasing debt leverage has been the game for decades now. Taking a stance against this leveraged and massive debt monster may have been right in theory and in essence, but would have been wrong in actual results, save for a few meltdowns over the last 2.4 decades of the worst (or some would say best) of it.
The debt has increased markedly during a time when the Fed is supposedly tightening monetary policy. The government (fiscal) is spending like a drunken sailor with Treas/Sec Janet Yellen, who I assume has a direct line to the outwardly hawkish Jerome Powell, right in there overseeing the process.
The NFTRH view is that in an important, divisive and downright scary presidential election year (in its lack of viable choices) the Fed is keeping up hawkish appearances with the Funds Rate, but relieving that pressure out its backside orifice through bond monetization activities (as per previous reports/graphs/data). My assumption is that it is doing this in coordination with the Biden admin, with Yellen as its point man.
My further assumption is that this is an ‘all or nothing’ play, a “last chance power drive” if you will, to secure the election by the Biden admin. Further still, my assumption is that IF they are able to keep up (debt-fueled) appearances into the election, what comes after is not going to be pretty. Quite the contrary, it will probably be very ugly indeed if/when 4 more years are secured.
Why do I say that now, at $34 Trillion in debt as opposed to some other time at less Trillions in debt? I say it because at some point there will be a saturation point, when the edifice stops growing and just wheezes, rolls over and deflates. I say it because…
…for the first time through those inflationary decades (for our purposes looking back to the 2000 time frame, but in the Continuum’s trend, back to the 1980s) “something broke, finally!”
I do not make a habit of getting hysterical about things such as irreconcilable debt because decades lined up one after the other are a long time. It was proven to me many years ago that ‘they’ can keep the game going longer than any given idealist can maintain a positive mental health situation while opposing it. You can be fundamentally pure and lead a hell of a lot of people astray. However, while not being hysterical (I don’t think ;-)) at the current time, I sure as shootin’ will highlight reasoning why it may be different this time, finally.
The Continuum chart was created many years ago to advise the intact downtrend in long-term Treasury yields. As noted many times, my view is that the downtrend – and its disinflationary signaling – allowed and enabled monetary policymakers (Fed) to promote inflationary operations at will. Why not inflate? The Bond market says ‘no inflation problem’! Well, in 2022 with the break of the decades old trend, the bond market said “inflation problem!”
Fast forward to 2024 and we see the government doing all it can to leverage more and more Trillions in debt for economic stability while the Fed plays hawk while also manipulating bonds to assure it does not play hawk too aggressively. Wouldn’t want to ruin good election year stock mania, now would we?
While I am of course only making guesses educated by indicators, I think it is a viable plan to expect them to try to keep things intact into the election, after which we will see a deflationary resolution. The other possibility is that the newly reaffirmed government (Biden admin) will just keep on fiscally pumping. But the second term imperative will be something less, don’t you think? If they grab power for 4 more years that’s a win. After that, Katie bar the door. All bets are off.
I am trying my best to just illustrate what the market’s indications are telling me. You may recall that I was critical of Trump. I still am. I wish there were another viable candidate to stand against the democrat machine. But the republicans are a mess, with a spectacular (one definition: strikingly large or obvious) figure at the head. I would also add the description ‘cartoon-like’. But what the party in power is doing is in my opinion mortgaging us all (we Americans, anyway) in order to keep power beyond 2024.
As such, the NFTRH plan is for this high risk process to continue as long as that risk is not realized. It’s a one-way ticket to paradise and a last chance power drive. It is dangerous, desperate and bullish. When my original rally projections of Q1-Q2, 2023 morphed into year-end I had this thought: ‘duh, it’s an election year and duh… it’s the most divisive election year maybe ever’. Markets are getting manic to the upside and the question remains ‘can they bring it to the finish line in November?’
Rotation
We have been nursing a gold stock rally potential as well as a potential rotation to include the anti-USD trades in commodities, resources and the countries/regions that produce them. Well, ground zero for speculation in commodity/resource related equities made a big move last week. However, the Gold/Silver ratio remains in its gentle uptrend (favoring Goldilocks) and the USD is still in intermediate uptrend, also favoring our favorite porridge pilferer.
Yet TSX-V rammed upward to the daily SMA 200, which is the lower end of the target zone. That could be all she wrote, but it feels like a market thinking about rotation. Not only has da ‘V’ bulled, but so too have other market segments like Energy, Materials, Industrial Metals, etc. This is the non-Goldilocks, pro-inflation trade stuff.
Friday sure was exciting as gold stocks rammed upward after our pre-market update highlighting the positives in play (especially the positive divergence by the Gold/RINF ratio). While the macro indications continue to show the sector as not unique (as it will be during a counter-cyclical economic backdrop), that was one heck of a move off of a secondary fade to test support.
GDX (daily) over the last couple of weeks popped from above the October low, dropped to fill the gap and shake ’em out, popped again on Friday and oh well, left another gap. The short-term double bottom and subsequent upside volume feels like something real, at least in the context of a tradable rally. Personally, I am constructive on the short-term but will not pull out my golden pom poms because other areas bounced or remained bullish. I want to have some diversity across ‘Goldilocks’ stocks, commodity/resource stocks and gold mining stocks, as well as a few global areas (e.g. Asia). All while respecting the risk indicators (the VIX divergence, especially, nags me) in play.
A subscriber requests a look at GDXJ, so here is the daily chart. It’s not much different than GDX as neither have done anything technically actionable other than hold above the October lows and bounced hard on volume. What the miners do have going for them are factors like sentiment and oversold conditions. The subscriber asked about targeting and given the non-trend and lack of a discernible pattern, I’d look for the area where resistance meets the SMA 50 and 200 and then the gaps above that. If we do see internal market rotations away from Goldilocks, we could be looking at significantly higher, given the sentiment situation from which the move took place.
As for ultimate targeting, our long-standing conservative view is for HUI to ding resistance at 500, which has not changed. The key is a future long-term beneficial macro backdrop indicated by deflationary pressure upon the cyclical and inflation-fueled macro.
Meanwhile, let’s grab the most important chart from the update linked above and note that the move in the miners (HUI), if it does extend, would begin to remedy the divergence of the Gold/RINF ratio, which is an indicator of counter-cyclical disinflation that could one day become uncomfortably disinflationary for the risk ‘on’ macro.
The above is a positive divergence for the miners. The other side of the same coin is the negative divergence of the Gold/SPX ratio. But if the stock market (currently at high risk) does get a hard correction this could easily be remedied as gold would very likely rise in stock market terms.
This could be the start of a rotation into stuff that is generally anti-USD. Gold miners, in their best fundamental suit (a counter-cyclical liquidity dump), would not necessarily need that. But commodity related trades would. Will Uncle Buck play ball? Technically, the intermediate uptrend is intact and the price is nesting upon the daily SMA 200. Those are positives. On the negative side, RSI appears to be breaking its trend with respect to its EMA 20 and MACD is triggered down in a posture to potentially roll over. Both are still positive (RSI above 50 and MACD above zero), however.
It has been a tawdry phase to this point as it becomes clear (to me, at least) that the Biden admin will do whatever long-term fiscal damage it deems necessary to secure short-term gain and the Fed speaks out of both of its orifices (hawkish in its rate policy from its official orifice and lenient in its monetization policy out of its other orifice).
Hence, we have markets – including USD/DXY – that just don’t know what to do. Or at least they are still sorting out what to do. That is how the markets have felt for months now, with one day’s or one week’s activity summarily reversed the next day or week. The feeling I get is that the machines and algos have been as confused as the next guy.
Sector Breakdown
Gold Miners
The miners launched on Friday amid oversold conditions and sentiment bordering on hatred. The macro fundamentals are obviously not yet uniquely in line for this sector with risk ‘on’ markets increasingly manic. The big picture view is an ongoing and terribly volatile bull market that began in 2016. The short-term view is that internal market rotations could (important word, “could”, as follow through is needed) ram the miners into a strong rally, ultimately ill-fated or not. I added to positions but view the sector as one play among many. After the risk ‘on’ mania will come the “unique” aspect of the miner view.
I have the positions I want. If I can get past the permit issue with MAIFF (MAI.V) I’d consider adding it. But you know how I hate having any kind of politics in my way or having politicians affecting my investments in a material way. I think highly of Doug Ramshaw, but I don’t think highly of any government authority holding the power to nix an investment. I also have former holding AMXEF (AMX.V) on watch, but it’s not very liquid. SILV and AGI are also on watch, valuation issues and all. But again, I have what I want and would be happy to simply add to those should I want to increase positioning going forward.
Gold & Silver
Meanwhile, this…
Yeah yeah, the momos will taunt that gold has gone nowhere since 2011 while the risk ‘on’ stuff has gone orbital. Yeah yeah… this is a bullish situation and it is one that is far from extended, unlike the momo stuff.
Gold’s extreme lag to the momo stuff indicates a non-unique backdrop for the miners. But the gold price is just plain bullish, technically. It’s actually pretty impressive when you consider that it could be getting murdered in an environment like this with sentiment so over-bullish and equities so manic to the upside. Perhaps sound money is valued beneath the surface of the market’s psyche. Technically, gold is short and long-term bullish. Based on two different patterns, gold has a viable nearer-term target of 2450 and a longer-term target of 3000+.
Silver is still in a long-term stance of correction with the potential to break out to the upside. If it does so it should well exceed previous highs in the 30 area. That area is resistance dating back to the lows of 2011-2012. A viable nearer-term target on a successful break above 26.43 (the 2023 high) is 36. I do not have a good read on a longer-term technical target.
Tech/Semi/Goldilocks
The leaders are still leading. SOX > NDX > SPX leadership chain is intact. So while there could be some rotation in play to include precious metals and commodities, that does not mean this play is over.
For me, there is still a place in the portfolio for the likes of the ZM and AEHR bottom feeds along with TENB and SMAR positions. SMCI, now added to the S&P 500, may have slipped away as it did not drop far enough for a buy-back (per this update) before rising again. I’ll keep it on watch. Some stocks got hit hard on earnings like ZS and FIVN. Earnings were positive but not positive enough. I want to be careful about bottom feeding just any old over valued thing. ZM was a pure bottom feed, but it was not overvalued. It was (IMO) undervalued.
Very generally, the Goldilocks stuff benefits in a disinflationary backdrop and is viewed to be making an upward correction of the relative hammering that Growth/Tech took in 2022. It is well on its way to closing out that negativity.
Commodity/Resource/Materials Related
We recently reviewed the bullish weekly chart of XLB, the Materials ETF. That was added and increased. We have also been nursing a position in Energy (XLE), pending a hold of the daily moving averages. XLE held and dinged a new high for the cycle on Friday. So far, so good. I will also lump Emerging Markets and Asia in here as they tend to positively correlate with the Commodity/Resource trades. AAXJ is still held and looking pretty darn decent in a neutral/positive biased way.
Uranium stocks took a hard pullback and on that pullback NXE was added and on Friday so too was the ETF, URNM. If the bull mania is fanning out to include commodities why would not the Uranium sector participate, given its previous bullishness even before such a rotation? I could not resist bottom feeding US based Rare Earths producer MP again, despite the gross chart. The same goes for Nickel prospect TLOFF (TLO.TO) as illustrated in the Trade Log.
The above are my picks and you may be doing research that highlights other stocks of interest. On a macro level, little of it will work if the mechanics of the rally do not rotate to include commodities and resources. Conversely, much of it will work if it does.
One area I have been holding back on is metals and mining. XME is on watch as are FCX, ERO, etc. If I continue to firm on an expanded rally theme, I’ll likely bring some of this stuff aboard as well. But I am being patient, balanced and aware that cash pays a good income (relative to its low risk).
Healthcare/BioPharma
The general ETF, XLV, has been on a firm rally since November. Its ratio to SPX/SPY is still downtrending in Drubsville. So this defensive sector is bullish in its own right and also in its relative performance is still bullish for the broad markets. When XLV/SPY bottoms and turns up for real we will have a clear risk ‘off’ signal in markets.
I am not overly interested the broad H/C sector. That includes medical devices, which was the industry my company served when I was in the ‘real’ economy (manufacturing). “Med-Tech” is generally overvalued and just another play to me, despite being relatively impervious to negative economic cycles. The chart of IHI is playing catch-up and there could be a few individual names of interest if I can find the time/motivation to look into them.
Pharma ETF PPH is way up in blue sky, while Biotech ETF IBB is just now making a move to surmount resistance and play some ‘catch up’. As noted in the Trade Log, I decided to just buy the sector rather than play the game of wondering who’s going to explode higher or get destroyed on clinic trial results.
It’s a manic stock market on a last chance power drive, after all. I am not marrying much of anything.
Defensives
While H/C can be considered defensive, Consumer Staples and especially Utilities are even more so. XLP is lagging the go-go stuff as you would expect in a manic market and XLU is trending down. I am not particularly interested in portfolio balance with defensives because cash is more defensive and it’s paying out.
Strategy, Short-Term
So my plan, as things currently stand, is to try to make hay with items that will move and then when it’s done, it’s done (Q4? Perhaps an interim correction sooner?). A counter-cycle out ahead will probably see most everything get corrected, including gold stocks if they participate in the rally as just another bull item from this point (although their correction since mid-2020 and the likes of the Gold/RINF ratio above argue that they just may resist a broad meltdown, if/when it comes). Having significant interest bearing cash will be important for a risk averse type like myself. It’ll help me speculate better with the cash I do deploy.
Strategy, Longer-Term
This is a rough sketch. An eventual blowout, whether before or after the election, will see liquidity pressure build and take down most sectors. The trick would be to know where your seat is when the music stops. That is IF you care to speculate on a manic market in the interim and thus, are not already sitting.
It would be after such a point that the gold bug in me will have his day. But he will need to be aware that his gold stock holdings could conceivably get wrecked one more time before a longer bull market phase ensues. But again, an argument against that is that the sector has been and still is in correction for 3.5 years now. So I don’t want to go on autopilot with that thinking because the work done over these 3.5 years just might protect the miners relative to the manic stuff of today.
Indicators & Sentiment
- The 30yr yield Continuum chart above implies that the macro has changed in a significant way. The trick is to correctly interpret the meaning of that change. I’ve tried to do so in the opening segment.
- The 10yr-2yr Yield Curve has eased of late, but maintains a steepening posture. To this point, the rise off of the extreme inversion has been a “bear steepener”, i.e. the result of rising yields and bearish bonds. However, with last week’s pullback in yields we can also realize that the situation could morph deflationary by way of disinflationary, allowing Goldilocks a perhaps brief window to continue. The curve is still inverted but one day when it un-inverts and the steepener gains momentum, we will be looking at economic hardship at best (likely through inflation) or an economic bust at worst (deflationary). Right now, it’s a slow moving process and the favored view (idealistic though it may be) is ultimately deflationary because the market will want to address decades of embedded inflationary effects.
- High Yield Spreads and Libor/T-bill yields continue to indicate risk ‘on’ and a sanguine backdrop. All is fine as speculation is alive, well and bullish. That by definition means high risk, however. Indicators like these will increase caution when one day they start to get off the floor and make some noise. That day is not today.
- Money Supply (M2) continues to be aloft because the Fed gunned it in 2020 and has been not only measured in removing it, but has been working to keep it aloft with its bond monetization operations. The policy bubble is intact and benefiting markets this election year.
- As noted above, the ratios of defensive items like Healthcare to the broad SPX are depressed with risk on. The ratio of counter-cyclical Gold to SPX is far worse amid the speculative macro playground. Risk is ‘on’ and risk is high, by definition.
- Meanwhile, the Gold/Silver ratio is a gently trending up and that gentleness (as opposed to a future impulsiveness) is beneficial to the Tech-led Goldilocks theme.
- ‘Real’ Yields (10yr & 5yr) have backed off significantly since September, 2023. This is another indication that monetary policy is not as tight as the headlines make it out to be. This pressure relief is supportive of markets at this time.
- The 2yr Yield/3mo. T-bill divergence is still in place and indicative for future bear market if previous examples (2000 & 2006) hold true. What’s more this has been in place for one to 1.5 years now (depending on chart interpretation) and is pushing the limits of the 2006 example, which dragged on for 1.5 years (+/-) before the market finally entered an obvious bear.
- VIX pulled back of late and is just about filling the gap we noted in an update last week. Linked update shows the divergence as well as the gap for your review. Dog gone it, I just may try shorting the market again after patiently waiting this out. Maybe should have tried it on Friday, but I had a busy day away from the office and was not watching it.
Transitioning from the VIX, a sentiment indicator (of utter complacency right now) of sorts, to Sentiment let’s have a quick look.
Smart/Dumb Money: Dumb money is briskly over-bullish while Smart money fades. Neither are at previous extremes, but they don’t need to be at this point in order to foreshadow a market correction. They are intact conditions should a correction be in the offing. Further, Sentimentrader shows market risk to be quite high on both the short and long-term views.
Investors Intelligence: Newsletters are extremely over-bullish at a Bull/Bear ratio of 3.45.
AAII: Ma & Pa have been fading of late and are only moderately over-bullish.
NAAIM: Investment Managers are briskly over-bullish at 89%. They’ve been more so in the past, even leveraging above 100%. But this is still an extreme reading that would be a condition for a correction or a top.
Portfolios
A perma note that funds are balanced by gold (long-term risk management & monetary stability).
‘Savings’ account holds two positions. GOLD will likely be sold since it is also held in the IRA. The idea on AE.V is for a long-term hold. Position was increased last week.
Roth IRA (non-taxable, no contributions)
Cash and equivalents are at around 78%.
The portfolio is anticipating the beginnings of a rotation to include the more cyclical stuff (along with the Goldilocks stuff). But also, counter-cyclical gold stocks are held because of the larger forward macro view. I also remain well aware of the broad market’s risk profile, which sucks.
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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