Blog

US Stock Market: Anticipated correction is here. There could be a short-term bounce to test 50 day averages, but correction likely has lower to go. Segment illustrates SPX targets.

US Market Sentiment: Sentiment is pulling back as stock prices do. This could coincide with a market bounce, but a real correction ending drop in sentiment is nowhere near registered yet.

Market Indicators: Sleepy indicators (e.g. High Yield Spreads, Libor/T-bill) woke up a bit last week and followed a VIX spike with the market decline. But there is little yet that looks extreme to the bearish side short-term. Long-term, there are indicators aplenty flashing ‘risk’.

Global Markets: Generally correcting with the US. Segment discusses several individual markets.

Precious Metals: The macro is changing in favor of gold. This has been anticipated. However, the miners are not quite ready to leverage gold’s counter-cyclical aspects to any great degree. That should come in the months or year ahead. Meanwhile, gold is near its initial target of 2450 (longer-term target is 3000) and silver targets 35 off of the pattern breakout. This could come after a pullback, however, as precious metals complex is overbought. Gold stocks are in a short-term consolidation after becoming overbought. A Diamond pattern is not continuation or reversal. It can be either. A pullback would be viewed as a buying opportunity and upside targets are GDX 40 and HUI 300, each +/-.

Commodities: Leaning toward an end to the recent whip up in inflation, but counterintuitively, it remains to be seen whether this would adversely affect commodity prices because for many markets, disinflation has implied a dovish Fed and a dovish Fed has boosted many markets. Items like Tech would be favored in such a return of Goldilocks, however. Industrial metals are looking good, Uranium vulnerable after its long leadership phase and the segment reviews the usual sub-sectors.

Currencies: USD has based and will attempt to make the next higher high off of that base low. However, gold is trouncing all global currencies, including USD. This renders USD as a gimmick that appears bullish simply by decree of its reserve status. But that gimmick’s price is still bullish. Looking for a higher high and then a pullback, which could coincide with a future market rebound into Q4.

US Stock Market

Last week’s summary of the US stock market:

US Stock Market: Now that the rotational sectors (cyclicals, materials, energy) that had previously supported broad SPX are weakening or had a sharp reversal on Friday, it is time to consider the prospect of a market correction. Possibly the theorized hard correction that would renew the bull later in the year for a hard run into Q4.

The stock market is doing the right thing, if there is to be further sustained upside later in the year and into Q4. Ironically, the longer the unabated rally from October, 2023 would have persisted, the higher the risk would have become for the broad stock market.

I hold next to nothing in the broad stock areas. MP Materials (MP) and Zoom (ZM), the former I view as a strategic position that I want to be holding when the day comes that it finally puts in a reliable bottom, and the latter being a stock that was bought for its massive sell down to ‘value’ status after previously having been grossly over-valued and over-hyped.

Aside from that, in light of the anticipated future macro shift to counter-cyclical, I held remaining gold miners and added a couple of positions as well. In not selling, I will continue to hedge those positions at certain points. Which I did over the weekend. That (hedging) is a double edged sword, however. More on the miners later.

SPX (daily) is becoming oversold already as it fills the upper most gap. I expect at least a test of the 38% Fib retrace level and the green shaded support range just below it. But due to the state of the oversold RSI, let’s be aware that a bounce can manifest at any time now. A classic situation would be a bounce to the SMA 50 for a test, fail that test and decline anew. The best looking ultimate correction targets are the 50% Fib (4686) coinciding with the SMA 200 (4674) and the 62% Fib retrace level at 4549, coinciding with clear support as marked.

I want to try to stay disciplined about keeping that wider correction view, even as the markets will do short-term up/down day trader stuff to add noise to the situation.

The stock market bottom line continues to favor a ‘healthy correction that resets sentiment and previously overbought readings for a bull drive into Q4’. Until it violates its major uptrend by losing the October, 2023 low of 4103 the correction should be managed as just that, a correction to an intact bull market. For reference, that is what the July-October 2023 downturn was.

US Stock Market Sentiment

Smart & Dumb money indicators have not reacted to extremes yet. We can anticipate extremes in Dumb money bearishness and Smart money bullishness at the next real (i.e. non-daytrader) low. Also, note the risk level of gold according to Sentimentrader’s short-term indicators. That is the sign of a bullish market and it is also the sign of price risk in the short-term.

This adds emphasis to the reasoning why, in not selling more miners, I hedged them and do not plan to short the stock market (without a setup like the aforementioned prospect of a bounce to test the underside of the SMA 50). I could envision a short-term burst of happy stock market sentiment relief that also pressures gold. Not a prediction, but an awareness.

The other suspects:

Investors Intelligence: Pulled back from its spike to a 4.4 Bull/Bear ratio to current 3.9. That is still very elevated and indicative of a correction not yet over (but potentially allowing for a short-term bounce).

AAII: Similarly, pulling back from an extreme Bull/Bear ratio of 2.6 to a current 1.1, which is still elevated. Same message as above.

NAAIM: On a steady march away from previously leveraged bullish status. Note the trend since the March 13th high of 104%. This too aligns with the above. Potential for a short-term market bounce but a wider market correction not yet done. NAAIM should be somewhere in the 20% to 25% range at a sustainable market low.

Market Indicators

• Gold/Silver and Gold/Copper ratios (see Friday’s update) indicate risk (as Au/Ag & Au/Cu have pulled back hard, but remain within uptrends) to the inflation trades in commodities and cyclicals, and if the market views them as inflation trades (which they are not), the gold miners. With the stock market already correcting notably, it is conceivable that the disinflationary implications of a rise in those ratios could also play well with the stock market bounce scenario noted above, with the Goldilocks likes of Tech potentially leading. That is IF the ratios turn up, which they have not yet done. If they break down we’d likely have an intensifying inflationary macro on our hands.
• Treasury yields spiked and then eased to end the week. I am leaning to the view that long-term Treasury yields have topped and bonds bottomed. TLT has tested and thus far held support at its 62% Fib retrace level. This could spell short-term stock market relief.
• VIX made another hard spike up on Friday, before reversing in-day. That spike and reversal works well with the short-term market bounce theme.
• High Yield Spreads & Libor/T-bill spreads continue to indicate a relatively calm backdrop, although HY spreads have elevated lately from a very low level (3.1 to current 3.4). A rise above 4 would signal real trouble brewing. Libor/T-bill has also risen a bit lately, but at .15 is still well below the spike above .50 in 2023. These indicators also play to the short-term contrarian market bounce script, but are not at all contrary bullish beyond that.
• 5 & 10yr Inflation Breakevens have been moderately rising so far in 2024 while CPI “inflation” continues upward. So our theorized moderation in inflation signaling remains “theory” just as the projected bounce in inflation signaling was theory… until it became reality.
• The 2yr Treasury yield continues to negatively diverge the Fed Funds proxy (3mo. T-bill yield) per the chart below. This is a very slow mover as the chart has displayed this condition for roughly a year now. If the favored view of short-term moderation in inflation signaling plays out we would then expect the 2yr (green) to pull back as well and maintain the divergence. It is important to remember that history has shown that it is when the Fed starts cutting that the stock market blows up. It is contrary to most of what is in the financial media and the mindset of the average investor.

US Markets Bottom Line

The favored view is for a near-term bounce/rally to test index breakdowns below the 50 day averages. This would be followed by the next correction leg. Further still, the view favors this as the “healthy” correction prior to a new drive upward later this year. Of course, with the excessive over-bullish levels in investor sentiment already logged in 2023 and 2024, we should not rule out the prospect that it is ‘game over’ for stocks for this cycle, election be damned. But it is a long way down (SPX 4103) before a real bear market would be confirmed, technically.

Global Stock Markets

• ACWX (Global, ex-US) is dropping to test its 50 day average within an uptrend. As with US indexes it looks like it can drop further (uptrending SMA 200 target at 49.27 with current price 51.16), possibly pending a bounce to test the SMA 50 (52.29).
• European SXXP has been stronger than the balance of the world as noted above, or the US. SXXP only lost its SMA 50 last week. This could well mean it has some downside catching up to do. SMA 50 is 500.50, current price is 499.30 and the uptrending SMA 200 is 470.21.
• UK 100 got knocked down from 8047 to the current 7895. The daily SMA 50 is at 7771 and clear and strong looking lateral support is at 7720 (+/-). Frankly, this looks like the most buyable global index I’ve seen, from a strictly technical perspective.
• Japanese Nikkei is finally on a hard pullback. Very clear visual support exists at 33000 to 34000 (current index price 37068) and the uptrending SMA 200 is near there at 34520. If you missed the Japan train, are bullish and think it has further to go, you might fish for the 33000 to 34500 range.
• China Large Caps & A-shares each still bouncing within downtrends.
• Asia (ex-Japan) & EM are still constructive in their neutral trends. AAXJ and EEM are each declining for a test of the 200 day averages. EEM’s SMA 200 is actually trending up while AAXJ’s is sideways.
• Canada Senior (TSX) declined to test and thus far hold its daily SMA 200. Canada Junior (TSX-V) remains on its intermediate uptrend from Q4, 2023 but is pulling back to test the intersection of the 50 and 200 day moving averages. See chart below.
• Aussie AORD has gotten clubbed from its recent high of 8168 to 7817. The rising SMA 200 is at 7566. That looks like a good ultimate correction target.
• Brazil Bovespa has declined to just above its daily SMA 200, which is at 123160. However, it could also decline further toward the October low of 111598 to try to establish a higher low.

Da ‘V’ remains in a series of higher highs/lows after turning down hard from clear resistance (and one of our upside targets). Another viable target is above at the August ’23 gap (620). If this index holds its uptrend by either holding nearby support coinciding with the converging moving averages in the low-mid 560s or puts in a higher low above the last low of 541 the inflation trades in commodities and resources would gain a tailwind.

Precious Metals

Gold stocks continue to sport an overbought situation by the Bullish Percent Index. It is a picture of elevated risk for the gold mining sector.

Dialing the view out to 2018 when a hard secondary retest of the bear market low in gold stocks (the 2016 low) occurred, today’s BPGDM excess may be indicative of a real bull phase. While volatility will always be in play, the gold miners tended to stay overbought by the BPGDM indicator all the way to the top of that rally leg. Point being, BPGDM spelled trouble from 2020 through 2023 when it rose impulsively, as it has recently. But… if it is a new bull market leg in gold stocks there would be much higher to go while the indicator remains overbought.

We discussed a potential short-term Diamond consolidation pattern (not continuation or reversal but rather, a ‘decision’ pattern) in a video update on Thursday. I decided to act upon it on Friday by adding the DUST hedge back again. The primary reason being that last week’s recovery rally to the Diamond’s current right side intersection has come on weak volume. But with GDX still within the pattern, we note another parameter from the update; that a rise above the pre-reversal high of 34.49 would likely set the sector free. That would also break the diamond to the upside.

But folks, that is trader talk above. The wider angle view is that the sector is grinding toward a positive macro for gold mining, which would be negative for most other things. I believe a disgustingly painful bull market cycle actually began back in 2016 and is fully intact. So please understand ‘am I investor, swing trader or daytrader?’ and manage accordingly. I am a swing trader at this time and likely until the macro sorts out more substantially.

HUI monthly shows the conservative rally target to the top of the downtrend channel. This may also be one heck of a handle being fashioned prior to a strong future move to our long-held target at 500 (+/-).

HUI monthly (log scale) shows the trend channel projected from 2000 (but mainly from the 2016 low) completely intact. Log charts tend to be better for smoothing trend views than linear charts.

Back to the macro view (daily chart), we find gold spiking vs. stock markets and maintaining trends vs. commodities.

Dialing out longer-term, the view moderates and shows that gold has more work to do in order to bust the macro into a new phase. So, easy now gold bugs. It is still just a sideways trend. Gold/Commodities continues to bias to the upside and that is a macro positive for the counter-cyclical gold sector.

If this chart does not prove our theme that, unlike the view of a majority of the inflation-focused gold bug sphere, begs a counter-cyclical (i.e. not Goldilocks) disinflationary view, gold continues to rise vs. a gauge of inflation expectations, RINF. The chart was originally produced to show that HUI had a positive divergence in play by Gold/RINF and for the last 1.5 months it has reacted positively to that divergence. Gold is gaining the upper hand over the inflationary macro, and that means the miners will one day leverage that upper hand.

Gold and silver continue to duke it out with respect to leadership. I am leaning toward rising Gold/Silver and Gold/Copper ratios per the update linked in the Market Indicators segment above. But regardless of who leads, this clear breakout in Gold and Silver bullion holder CEF is clearly not bringing much bull ending euphoria to the table. Indeed, the negativity is as pronounced as it has been in years with a 4.7% discount to NAV. It’s either a positive contrary commentary on the precious metals or a sign that people don’t trust the Sprott empire.

Other points:

• Gold’s Commitments of Traders (CoT) is quite elevated and contrary bearish, but it is not critically so. Silver’s CoT is in the same general state. These two readings of excessive Spec longs and increasing Commercial shorts indicate the potential for a pullback from a contrarian sentiment perspective.
• HUI/Gold ratio bounced in ‘V’ fashion from the early March low, doinked the SMA 200 and pulled back to test the 50 day average, which it still holds. It’s major trend is still down. That will not be the case if the miners leverage gold’s standing in the new macro, as expected, in the coming months/next year.
• Gold is still operating to the 2450 target, although that may be in already with the two recent stabs up into the 2430s.
• Silver’s target is 35 (+/-) off of the breakout from the bullish weekly chart consolidation pattern. However, that does not preclude a pullback first.

Precious Metals Bottom Line

The rally off of the late February lows is still on. However, the situation got overbought and will be subject to volatility. Targets remain Gold: 2450, Silver: 35, HUI: 300, GDX: 40.

Macro fundamentally, gold is grinding out a new standing vs. stocks and commodities but has not yet established a post-bubble dominance. Far from it. So with the precious metals, and especially the miners, generally having run with the various risk ‘on’ trades, anti the Fed and its supposedly hawkish policy, the sector is not yet unique and is still considered a swing trade. A longer-term buy could come when the stock market tops out for good and the miners get pulled southward with it, initially.

That’s the plan at this time. We will adjust if the macro turns sooner than expected. For example, if the precious metals remain firm and the miners resolve upward from this consolidation while the stock market continues to weaken, we could see the post-bubble macro sooner rather than later. We are dealing in probabilities, but should also be aware of possibilities.

Commodities

Commodity, and especially copper bulls got a new bounce in their step lately. But this was anticipated as we expected the broad market rally to fan out to include these areas. It did, the broad market went into correction and now most commodities have hit turbulence. Copper being an exception as it ticked new highs for the cycle.

However, with gold out-performing inflation expectations (RINF) and still clinging to its uptrend vs. silver, the downtrending Copper/Gold ratio casts doubt on a new inflationary phase. At least a new inflationary phase that would be in any way beneficial to the cyclical economy.

Here is the bigger picture, which we have not looked at in quite some time. This is not cyclical inflationary signaling. Thus far the disinflation has been of the pleasant Goldilocks variety, but the expectation is for disinflation to tip over toward liquidity problems and a perhaps a deflation scare. Again, if indicators like this and the Silver/Gold ratio break their downtrends we’ll have to adjust. But…

GNX/CRB/DBC: Commodity indexes/ETFs pulled back last week but maintain the uptrend from early March. A longer-term view shows what still appears to be a long, bullish consolidation from the Q1, 2022 highs. This bullish technical view is at odds with my disinflationary view, but in this market it is important to remember that some things are doing the opposite of what’s implied…

• USD is bulling as currency compromising inflationary effects permeate the economy.
• This is because the market still takes the Federal Reserve seriously and cowers before its every hawkish utterance.
• Conversely, at various times ‘inflation’ markets have experienced relief when disinflationary winds gently blow because of that same submission to the Great and Powerful Fed (of Oz), when the implications are dovish.

So it is not necessarily as simple as inflation up, commodities up or inflation down, commodities down. Commodities are technically not broken and if the broad market gains relief, so too may commodities. But they are not favored in relation to the macro anchor, gold.

Industrial Metals: Indeed, the Industrial Metals complex (GYX) is following its headliner (Cu) upward in a solid rally. I was looking at my former bag hold position in TLOFF (TLO.TO) ram upward late last week and thinking, ‘hmm, maybe it’s just time’ for nickel and other industrial metals to get with it. We have anticipated that some of these lagging commodities can gain a bid before a more pervasive market correction ensues.

Copper has very positive global supply/demand prospects, as do some other metals. The issue we are focusing on is ‘interim’ stuff. Potential deflationary stuff.

Uranium: This sub-sector led the whole shootin’ match. I have gone sidelines, but the play is not technically broken. What I don’t care for is the lack of any kind of visual chart support until 75 (current u3o8 price: 89.30). The best of the play may well be behind us, although U remains a sector with uniquely positive global supply/demand fundamentals and as such, will remain on watch, personally.

Lithium, REE, Palladium & Platinum: These specialty commodities are very much subject to their own supply/demand fundamentals. For example, Lithium got pumped way too far on the EV craze and is now roughly 80% lower than its highs. Premier Li stocks ALB and ALTM are down in the 60% to 70% range from the 2022 highs. Nickel caught some of that same cold. Copper is a more diversely used metal (including EV), which keeps it stable.

REE is a more opaque situation, controlled as its market is by China. But I continue to focus squarely on MP Materials (MP), which not only mines Rare Earth Elements in the US, but is also working toward processing them in a closed loop strategic benefit to the United States. I hold it, although it remains in a downtrend, as does the ETF, REMX.

Pd and Pl each pulled back last week, but each has the potential to be making a base/bottom. They are on watch, although their global supply/demand fundamentals are complex and I have not kept close track of them.

Agricultural: GKX continues in a downtrend, while the ETF, DBA hits a new 10yr high. The ETF’s top 3 holdings are cocoa (29%), coffee (13%) and cattle (13%). I wonder who is driving the ETF’s bus?

I’ll continue not to have much interest in the overall downtrending sector for the time being.

Currencies

Let’s start with this picture of the monetary metal exposing global currencies in a worse manner than it is exposing the US dollar, which has been bullish nominally but is bearish in gold terms. Sure, gold is getting overbought nominally and in relation to other markets like stocks and FOREX, but we should keep in mind that the bigger picture signaling is quite negative for the forces of convention emboldened by the last 20+ years.

The macro changed and convention is not what will be called for in whatever our new realities turn out to be.

Meanwhile, intrinsic value void or not, the USD is still the global reserve currency in the decaying world of debt paper (as exposed by gold above). It almost feels like the last man standing, and that man is only standing by decree of the remnants of the conventional ‘wisdom’ that terminated in 2022.

Off the soap box and onto the technicals, the weekly chart has based and the next milestone in an uptrend from the July, 2023 low would be to tick a higher high to the October, 2023 high of 107.35. If this does not become impulsive along with the Gold/Silver ratio, USD could then start a new pullback within its uptrend (series of higher highs/lows). That could coincide with the current view that after the current correction markets could put on a significant bull move into Q4.

I am shoving a lot of information at you. But the situation is complex and I want to get these markets right. Can’t do that by writing blurbs, soundbites or dogma. I hope the info is digestible.

Portfolio

Funds are balanced by gold (long-term risk management & monetary stability).

Holding Au/Cu explorer AE.V in a separate account. It’s a long-term play if its story remains intact. The position was last increased on April 11 and is currently profitable at 16.6%. This position was taken on the view of a geologist I respect and affirmed by another source who has done a ton of DD. It’s still a lottery ticket, but it’s one that has very good potential to pay off in the next few years.

Roth IRA (non-taxable, no contributions)

Cash is 90% and I am enjoying a stress free existence, market-wise, at least.

Most broad market positions are gone, but I am watching items like Semis NVDA, SMCI, Cloud security plays CRWD, ZS and TENB, and several others from varying sectors for buys, hopefully at correction lows. I may even day trade a little (e.g. quickly going long if I think a bounce to test the SMA 50s is imminent, or shorting from such a setup). But generally, waiting is not hard to do when cash is still paying us to have patience.

Gold stocks still held do not raise my blood pressure as risk has risen because I took enough profits and these are the ones I really don’t want to sell (exceptions being SKE if it breaks its ‘W’ base pattern, MAIFF if it does not get that permit and specs AMXEF and NFCG if they whip up good profits again). DUST helps there, but I’ll keep that on a tight leash as usual.

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.

NFTRH is not to be distributed to third parties without prior written consent

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.