US Stock Market: Decision point. Made a move toward correction on Thursday, bounced a bit on Friday. Semi > Tech > Broad leadership healthy, internals intact, risk high.
US Market Sentiment: Per last week; “Risk aplenty. Over-bullish sentiment is a feature of a bull market. It will also be there as a condition of the bull’s end. On balance, participants are briskly over-bullish if not yet nose bleed heights of over-bullish.”
Market Indicators: Per last week; “Sleepy indicators sleep, which implies risk from a complacency viewpoint. Also the Gold/Silver and Gold/Copper ratios did not go to sleep. They got hammered upside the head and PUT to sleep as froth momo speculation (and associated risk) ensues. Other slower moving indicators like 2yr yield divergence to the T-bill and Yield Curves are slogging along a muddy trail to the time they will one day end the party.”
Global Markets: Same general status as US. Decision point.
Precious Metals: With HUI/Gold ratio intact to the rally we have an internal indication that the rally may not be over. But the bulk of the distance to target (GDX 40, HUI 300) has been put in and that warrants an increasingly cautious view on PM/miner prices. But the technicals indicate likelihood that the next phase of the bull is already on. We know that about gold, but silver and the miners have made good technical strides and could be leading the macro, which is still fundamentally incomplete as the “everything bubble” drags on.
Commodities: Commodity indexes are neutral at best on the daily chart view. But the long-term view, especially in consideration of what appears to be a new structurally inflationary macro, could finally validate those projecting a “commodity super cycle” all these years. Meanwhile, a decision point in the short-term, as with many other markets.
Currencies: That is largely because USD is at a decision point of its own. See next segment…
A less structured, less lengthy edition this holiday weekend. Let’s hit some key points and enjoy some down time.
Bull?
Bearish engulfing candles showed up Thursday on SPX and reversal candles also appeared on other major indexes. Candle management is usually daytrader stuff, with the rule being that a bearish daily candle need only have 1-3 days of downside follow through, as opposed to a signal for a deeper correction. Well, even that modest rule was broken on Friday, at least temporarily. The Bearish Engulfing is still there and still in effect, technically, despite Friday’s relief.
It is important to note that major US indexes ticked new highs before the pullback. Those new highs were either a bull trap prior to correction (trapping breakout momo players) or scouts for future upside. I am not sure what painted the engulfing candle on Thursday. If there was inflammatory news I did not catch it (I have been very buys outside of markets lately). But if it was news driven that is a check mark in the bull column because that stuff usually only has an effect of a day or two as well, right in line with the engulfing candle.
Much will likely come down to the status of the anti-market, USD (daily chart). No big surprise there. With USD pulling back on Friday it is little surprise that markets partially reversed the bearish situation that come on Thursday with USD rallying. The potential bear flag scenario clung to life on Thursday and held serve on Friday. For USD, let’s simplify to two cases:
- It is a bear flag, USD breaks down and the asset market party gains a tailwind. Aiding this option is the low volume on USD fund, UUP. Declining volume would accompany a bear flag.
- It is not a bear flag, USD takes out resistance and the SMA 50 and there’s a turd in the punch bowl. The case for a pro-USD, anti-market outcome would be aided by gold outperforming items like silver and copper.
But not only has gold not recovered in silver and copper terms, it also took a negative move vs. stock markets. Views like this one indicate that gold was due for a pullback vs. stocks…
…while this view had appeared constructive for gold vs. stocks as the ratios rode the SMA 50, until the end of last week. The Gold/Oil ratio is still bull biased.
- If USD gains the hawkish Fed bid (which is IMO a joke, but the machines are playing it literal) AND gold ratios start to rise, risk would be indicated going “off”.
- If USD breaks down AND gold ratios break down/remain weak, risk would be indicated going “on” amid a speculative atmosphere. .
Arguing for the bullish case is the SOX > NDX > SPX leadership chain, which not only continues to show Semi leading Tech (NDX) and broad (SPX), but also now a move to regain footing by NDX/SPX. Leadership indicates that risk is already “on”.
Risk also remains “on” by the XLV/SPY ratio, as bottoms in Healthcare vs. broad indicate speculative risk is as high as it’s going to go prior to risk “off” and bear markets/phases. As yet, no bottom indicated but risk aplenty.
The big picture is indicated to be on a long march to the top of the current bull market, like the gap between the Fed proxy T-bill yield and the 2yr below. In other words, little has changed as indicators like the above and several others continue to indicate high risk and a still intact speculative atmosphere will other slower moving indicators imply that risk will be realized, sooner or later. Our theme is for a drive to or through the US election. But also be aware that with risk at such high levels a negative even (interim correction or even the end of the bull) can come without warning at any time (actually, there is and has been warning per this chart and other indicators lumbering long interminably).
The Plan Continues To Be…
- A bullish market, which has fanned out as expected to include other areas (as indicated by the TSX-V index, among other signs), logically remaining intact by hook or by crook in a critical election year. This is subject to risk, which is generally at nosebleed levels and could suddenly be realized at any time.
- Fiscally, the Biden administration is trying to keep it stitched together with a bag full of initiatives supposedly aimed at benefiting the American people that will eventually further impair the American people through ongoing effects of the inflation that Fed and government have wrought, and through the leveraging of the national debt, which is over $34 Trillion. New initiatives are being funded out of that bag of debt.
- The question, however, continues to be the ‘will it or won’t it?’ question regarding a negative market liquidity event in the interim to future inflationary effects kicking back up.
- Whether it is increasing access to Social Security, working with quasi government GSEs to help borrowers avoid the high interest rates demanded by the bond market, funding Semi, EV and other favored areas or protectionist policies against China and others, the result is going to be inflation. That or the end of the system. But on the shorter-term, we need to watch USD and its associated gold ratio indicators to determine whether it is going to be a straight, absurd and bullish shot into the election or an interim liquidity problem that may act as a bull refresh/reset prior to the election.
- When you consider that the government is much more likely to try to inflate away its debt over time, the big picture answer seems clear. As my late friend Jonathan Auerbach once (in the midst of the 2008 meltdown) declared to me “it’s inflation all the way, baby!”, except when it is interrupted.
The bond market indicates Jon’s viewpoint well. I’ve hammered you repeatedly with this picture, but its significance is profound. To review, our interpretation of the long-term decline in Treasury yields was that it allowed government and the Fed to act as if inflation were under control and inflate as needed at every crisis.
<insert here Alice’s contrary words I have tattooed on my arm, and that I live by in financial markets: “What is, it wouldn’t be. And what it wouldn’t be, it would. You see?”> When is disinflation inflation? When its signals are all that is needed to manufacture inflation as needed because confidence is intact that there is no inflation problem.
Now that the Goldilocks disinflationary trend is broken the operating theme is that any deflationary phases along the way will likely be fought as usual with inflationary policy by government (fiscal) and Fed (monetary), but that this racket that worked so well into 2022 has hit a saturation point.
Either coming inflationary policy will not work and the macro will fall like a souffle’ with the system as we know it ending, or inflationary policy will work just fine, but it will only feel that way if you are the owner of the things that are rising in price. Stocks may not be a primary beneficiary in coming inflation phases because the indication, assuming the government is not able to perma-stimulate to economic benefit, is a more economically corrosive, stagflationary situation.
As for the global view, let’s generalize with the Global (ex-US) ETF. As with the US, can we at least get a simple tap of initial support at least, or are we going to play the bull frenzy game all the way to Q4? Much like the US, a “healthy” correction would tap support toward which the 200 day average is rising. But do momo-fueled markets really care about “healthy”? Answers upcoming.
Stock Markets Bottom Line
Markets are intact and risk is high. Leading indicators are still favorable and long-term risk indicators are still deplorable. Sounds about right. My personal plan is to manage risk tightly as the short-term correction view appears at least as likely as the short-term bull momo view.
Furthering that cautious near-term view are the likes of US market sentiment indicators like Smart/Dumb money and accumulated risk indicators both short and medium-term.
Gold Stocks/Precious Metals
The play bulled from from March 1 into last week. It became overbought by several indicators, including the Bullish Percent Index. After a down week the overbought signal remains in lace. But importantly, we are in a new bull phase on the bigger picture. Technically. Macro fundamentally things are still in progress and not complete.
The longer view shows an indicator overdone to the upside on the short-term, but it also shows that HUI has only barely begun its greater bull move. In other words, when the inevitable pullback does come about, it is looking like a buying opportunity, not the resumption of the negative stuff. Technically, the next bull phase of the gold stock bull market has begun, in my opinion. Technicals often lead fundamentals.
The daily technical situation was updated for GDX on Thursday. Friday’s bounce has not changed much. From the update. The pullback began at a valid point for it to morph to a correction. But technically, the play is still firmly trending up from March 1 and this could simply be a shakeout.
So here we come back around to the question of whether the broads are going to follow the Bearish Engulfing candle to a correction. Some market internals like a moderately negative Dow Transports divergence to the Dow favor it, but other better internal indicators like Semi leadership and Healthcare (XLV)/Broad SPY favor the intact rally scenario. Personally, I favor risk management now and any speculation (talking about broad markets, including the precious metals) undertaken will be subordinate to that.
The gold miners have generally been in tow with the broads. A real positive macro fundamental backdrop is not yet proven to be in place and as such, the miners are not unique.
Interestingly, the miners do continue to be in line with their best fundamentals lately, whether the funda are improving or degrading. Since the positive divergence in Gold vs. inflation signals in January and February, HUI closed the gap and has been gone up when gold outpaces RINF and down of late when it drops vs. RINF.
The HUI/Gold ratio held up last week and this shows the sector’s internals are still firm as the miners have not broken the intermediate uptrend in relation to gold.
Since the targets for GDX, HUI and silver were not quite tapped (unlike gold) we can certainly be open to the post-February leg not yet being over. It’s why I preferred to take profits last week, rather than start shorting to hedge. Taking profits is always a pleasant thing, which is much more than I can say for shorting.
HUI’s big picture monthly chart situation is showing an upper wick on the candle as anticipated per the three shaded previous occasions. But it is showing it from a lower level than anticipated. It is a logical spot for a correction, but so too would be a further run to break the channel and reverse (after GDX fills its gap near 40) as per the original plan.
HUI monthly log scale, for reference. Sweet, but not yet active for a new leg up to the ultimate target for the next leg of the bull market, which is 500 +/-.
Silver (weekly) did not hit the target. I did take the profit on SLV. But I also added SILV on its moderate pullback. It is apparently starting to perform well, operationally.
Several of my little fellers on the TSX-V were sold at significant profits on balance. That was after da ‘V’ filled the 622 gap, which was our next, and potentially ultimate objective. Now it is dropping toward the first support level at 597. If that holds, it could be party on, Garth. But a better pullback and test could come at the 50 day average, which is rising to meet support at 579-580.
Another important test will come in the form of its ratio to Canada’s senior index. A hold and new upturn could be a very positive bigger picture signal for commodity/resources and precious metals bulls if the more speculative areas start to outperform.
After having spent the last 18 years in the wilderness, a real bull move in the ratio would sure be something. The small resource stock play began to expire in 2006, was blown up in 2008 and has trended down ever since during an age when global central banking has been in complete control, managing the appearance of inflation problems right out of the picture. Again, see the 30yr Treasury Yield Continuum above… and ponder.
It is not my intention to stimulate your greed impulse, but imagine if this ratio ever does start to bull again. Imagine the potential profits that could come by catching the lows. Okay Gary, back to reality…
Commodities
The daily chart of SPGSCI (GNX) is not so good and as such, it is the driver of shorter-term outcomes. The best that can be said is that it is intact.
The weekly chart has a gentle consolidation look to it. For it to go bullish, however, it needs to take out the September highs per the daily chart above.
The monthly big picture shows that GNX has pulled a 50% Fib retrace of the move out of the 2020 depths to the 2022 high. It also has the potential of forming a ‘W’ bottom. But, that would-be pattern has not taken out the September 2023 high of 623.50, which is needed for pattern activation.
Bottom Line
Broad commodity indexes have the potential to bull now, or fail now and bull later. The daily chart is neutral at best, and will guide the near-term. So it has not shown its cards quite yet, much like the broader markets. Again, let’s watch the US dollar and the Gold/Silver and Gold/Copper ratios for indications. The answers will come and in the meantime, risk management is a sound option.
On the big picture, the monthly chart and the new age of inflation (ref. the 30yr yield Continuum) indicate that the “Commodity Super-cycle” squirrels may finally find their nuts.
Portfolio
Funds are balanced by gold (long-term risk management & monetary stability).
Holding Au/Cu explorer AE.V in a separate account for the long-term (it is taxable so I want L/T tax status, but more than that I want to see if it realizes the big gains I think it has potential for in the next couple/few years. Hat tip to geologist, MC.
Roth IRA (non-taxable, no contributions)
Cash/Equivalents are 89%. Nice and comfy. The key here is to not let daily swings (like Friday’s bounce in defiance of Thursday’s bearish index candles) affect emotions. It is going to play out into a correction or worse, a return of upside momentum, no matter the risk. The former would be healthier to our plan of a bull to/through the election. That latter would be very unhealthy because when such speculation would finally blow out it could get bloody out there.
I want to thank a couple people for the work they’ve done on some of the smaller gold stocks that have kicked off realized or paper profits: Joe for his stellar work on WDO.TO (WDOFF, profit taken), and Rich for his unyielding bullish view of OGN.V (OGNRF, still held). Nice profit taken on MAI.V (MAIFF, profit taken), which was compliments of Scott originally, but all me, baby, in latter years. Ditto RIO.V (RIOFF, profit taken) which was an IKN reco a few years ago but my own work in recent years.
The portfolio feels good, with gold stocks and Semi and a boat load of cash, which let’s not forget, is still paying out income. Imagine, getting paid for having patience. A healthy market correction would be preferred and the current view is that I would buy it for a perhaps final bull run in the broads. The more onerous option is that the pig just keeps rallying and risk keeps rising. We’ve seen that movie before as well. If that plays out, I will speculate but never take an eye off of risk management.
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.
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