US Stock Market: SOX > NDX > SPX leadership chain intact as each of these individually ticked new highs last week. There are bearish breadth divergences in play but those do not play out until they play out. The current situation is a whopper, time-wise.
US Market Sentiment: While collective sentiment indicators backed off a bit last week, the previous extreme was over-bullish and the situation is still over-bullish. Sentiment is a currently unhealthy condition.
Market Indicators: Sedate macro indicated. High risk macro also indicated, by definition.
Global Markets: Still aping SPX and the US headline indexes on balance, although the world, ex-US (ACWX) continued to trend purely down vs. SPY. If the US dollar and Gold/Silver ratio get a move on, EM and commodity/resource areas could be expected to take more pressure relative to other global markets. If the inflation trades resume (which does not look like the short-term indication) they could out-perform.
Precious Metals: Correction has come from gold’s target of 2450 and below the targets for silver and the miners. But the sector did registered indications that would be consistent with an oncoming clean out. It’s healthy and if we are correct that it can continue, buying opportunities will be scouted ahead.
Commodities: Gold/Silver and Gold/Copper bounced, despite nominal gold’s weakness. That is not positive signaling for commodities and anti-USD trades. For now, caution is warranted.
Currencies: USD decision point still in effect after another ginned up Payrolls report. See opening segment.
Intro
This is written after the segment that follows it. That segment set a course for NFTRH 812, and that course is macro. Since precious metals and commodities are at a point of volatility and stocks are vulnerable to interim pullback or correction, and since your letter writer is 90% cash (and enjoying that comfortable status in the short-term) I’d like to back off the routine management and try to get a handle on the macro situation. The bottom line for which is and has been: election year, and the Biden admin will do all it can to maintain market liquidity into or through the election.
US Dollar Gains ‘Fed Fear’ Bid, For a Day at Least; Fed and Government at Odds
A strong employment number, propped by government hiring to go along with embedded services industries, bulled the US dollar on Friday as “higher for longer” fears erupted once again. Is anyone else tiring of this spastic market that unhinges itself every time some not terribly unlikely news hits? I mean, come on guys. We know that the Biden Administration is doing all it can to prop the economy into Q4 (at least). Government is spending and jiggering out of its bag of debt to infuse funding into favored areas and manipulating other areas, like interest rates set by government sponsored entities in order to lend lower than prevailing market rates of interest.
Then there are the shenanigans the Treasury is employing to manage its debt and keep up appearances. It’s not a major operation, but it is another operation ‘helping’ the liquidity cause around the margins. If you care to, I’d recommend you check out this video sent by NFTRH subscriber, former banker and Austrian economics authority, Michael Pollaro. The treasury is paying off old debt by borrowing new money at higher interest rates in order to do so. Why? “Because nobody wants this [older, long-term] debt.”
Personally, I had never heard of Joe Brown, but Michael gives him a thumbs up and so I have the confidence to present it here for you. But… “markets are not the economy”… and that is a primary theme behind the name “Notes From the Rabbit Hole”; linear thinking such as ‘the government is doing unhealthy and desperate things, OMG, it’s gonna get bearish!!!’ should be avoided. Using debt manipulation, they can rig the system indefinitely until one day either the system can take no more or the manipulative entities have achieved their goal, and it is allowed to just wheeze and roll over. Until that day, ‘they’ hold sway. This dovetails very well with the reasons why we have set the presidential election as the “goal”.
The Fed is currently on the other side of the rope, higher, longer and compelled to play hawk as the government works the pumps to forestall the recession and/or market collapse that is indicated ahead. The Fed is still in tightening mode, as its balance sheet continues to contract. Regardless of back door operations, they are not net easing to any significant degree, so the Treasury itself is paying off old debt that nobody wants with new debt related to T-bills, which are the least risky bond market vehicle.
In short, the Treasury, which is to say the Biden Administration (with Yellen in the side car) is doing what the Fed is not doing (net, on balance). It is doing things that do not make sense in service to that which does make sense: GET RE-ELECTED. That conclusion is my opinion, grounded in indicator facts. What is happening is that liquidity in this oh so critical election year is being maintained by the administration in power.
On a related note, here is a look at TMS ticking positive, also provided by Michael Pollaro. TMS has ticked positive YoY:
More Indications
The Fed’s balance sheet continues to contract, on balance. Monetarists are not doing the lifting.
M2, a less nuanced view of money supply than Michael’s TMS, is still quite elevated after the 2020 panic up surge at the hands of the monetarists at the Fed. Obviously, the government’s fiscal folk want to keep this elevated in the near-term.
Velocity of money is one indicator that I have largely ignored over the years as deflationists and bears used to hold it up as a reason why the bubble was going to end in a liquidity nightmare any day now. It never did. Here let’s think about the 30yr Treasury yield Continuum and its gentle decades-long downtrend. Disinflationary signaling gave license to inflationary actions. Well, the same might be said of money velocity.
The reason it is included here is that after decades of going down, it has bounced hard…
…at about the same time the Continuum turned up and changed the macro.
Back on money velocity, the St. Louis Fed notes the following. I think the distinction of “domestically-produced” is important in a time of fiscal efforts to maintain the US economy prior to the presidential election. As a former manufacturing guy, I am all for domestic production, although, given the massive services weighting in the US economy as reflected weekly in the BLS payrolls report, it is likely a services bonanza driving the munny bus. As a financial guy, I am suspicious of some of the motivations and methods that may be behind it.
“The velocity of money is the frequency at which one unit of currency is used to purchase domestically-produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy.”
St. Louis Fed
The spread between high yield and quality bonds indicates that risk is ‘on’, complacency is in play, speculation is alive and well and the bubble is intact. Again, just the way an entity that wants to retain its seat of power would like it.
Similarly, the Libor/T-bill yield spread is calm.
The VIX is asleep on the floor. These indicators continue to say ‘all’s well at this moment in time’, but this moment in time can end abruptly at any time because risk is high and a feature of the bull market.
US market leadership is fully intact (by our preferred measure) as the Semi > Tech > Broad leadership chain looks damn near impeccable.
There are issues with breadth, however, as equal weight SPX is floundering vs. headline SPX. This is unhealthy signaling but “headline” SPX is keeping up appearances. RSP/SPY tends to lead bear markets and corrections in its negative divergences. The current divergence is a whopper and it is ongoing. If you believe in balance, you may also believe that the next economic bust is going to be commensurate with indicators like this persisting for such long periods.
Below in More Indicators we review gold’s less than stellar state vs. headline US and global stock markets. But in another sign of the broad market’s bad breadth, let’s also note gold’s extended uptrend vs. the median US stock as gauged by the Value Line Geometric index. Gold/XVG is currently pulling back within a long uptrend. This uptrend is another extended and negative internal market divergence.
Finally, Clark’s old fashioned indicator, Dow Theory, shows the ascot and cognac set pensive, even apprehensive while the new kids in the market like the Reddit Gamestop manipulator and Bitcoin speculators carry the day. Will Grandpa’s favorite indicator eventually mean something? Probably not. It’s a manic bubble, after all. But the fact is that the Transports are on a negative divergence to the Dow, for whatever it’s worth.
US Dollar
This crazy mix of hawkish (monetary, anti-liquidity) and dovish (fiscal, pro-liquidity) is informing the US dollar. As yet, Uncle Buck doesn’t know what memo he is getting after breaking down from the little bear flag, testing critical support and ramming upward on Hazel Day, I mean Payrolls.
From key short-term support to key resistance in a flash. Decision point still on. Just as the 104 area is the downside trigger, 105 (actually 105.20) is the upside trigger. When USD takes out one of these, assuming it’s not a whipsaw false move, the direction should be set.
Bigger picture (weekly), USD does appear postured to do some damage to markets, at least in the interim. If that is the case, FOREX is valuing the Fed’s relative hawkish position over the government’s pro-liquidity position. Playing it straight by the technicals, USD has corrected from the height of Fed hawk mania in 2022, based (making one higher high and one higher low per the green arrows) and created an intermediate uptrend channel (encompassing all of 2024 so far). Again, 105 on the upside and 104 on the downside are the keys, short-term. But this chart biases technically bullish.
The even bigger (monthly) picture again reveals an ongoing bull market from 2008. The global hegemon lives, and that is an ongoing risk to the stock market and the economy. Think of it this way, aside from the Fed’s supposed ‘higher for longer’ stance, the only thing left to drive the dollar would be a market liquidity event, sending casino patrons (including some global factions) scurrying into the world’s reserve currency. If fiscal liquidity actions even slip a bit or markets take a hit despite those actions, USD would receive the risk-off bid, even if it is interim to a resumed bull drive into Q4 for risk assets/markets.
More Indicators (because who can ever get enough indicators?)
The Gold/Silver ratio bounced, and if it continues to recover and move upward it would be an important anti-liquidity indicator to go with USD. If silver bottoms and takes over again, the signal would be pro-liquidity.
Gold/Copper is a concern for stock market/economy/cyclical bulls if the bounce goes far enough to reassert the previous uptrend. It’s at the first marker, the daily SMA 50.
Gold/Oil is an intact positive for the gold mining industry, at the face value of the oil price (whatever happens to fuel costs subject to regulatory hurdles and refining is not included here).
In the lower two panels you can see that stocks thus far have a ‘get out of jail free’ card in the face of USD strength. Backing out the jiggered jobs report, a weakening economy is seen through a Goldilocks (rose colored) lens right now.
Last week inflation expectations (as gauged by RINF) pulled back, but gold pulled back harder. That is likely inflationists leaving gold, not to mention those running from the ‘China to cease buying gold’ hype. HUI is still fairly well in line with the indicator. Some day when the macro is right we will want to see gold stocks in line with Gold/RINF when it goes to the upside (much like they caught up to the indicator after we noted the divergence back in Q1.
On Gold, Silver and the Miners
We had our targets. Gold hit its target of 2450 while silver fell short of 35 and HUI fell short of 300 and GDX fell short of 40. But they did not fall short by much. Considering the overbought readings of the Gold Miners Bullish Percent Index (BPGDM), a continued correction is certainly possible, if not likely. With the bulk of the upside objectives achieved, traders were advised to consider taking profits and investors to realize that volatility and corrections will come about. I took the profits I cared to take, but added a couple items back on the recent declines. We’ll see soon enough if that was a good move.
Again, I want to reiterate that the sector became overbought. But also that the BPGDM is in a new bull phase, in my opinion. If that assertion is correct, investors (as opposed to day traders) want to be aware of it.
GDX busted the SMA 50 on the surprisingly (really?) good payrolls report. I think that any bouncing from here may actually be an opportunity for speculators or hedgers to short and for most of us to stay patient. The correction is likely a healthy shaking of the excess momos and inflationists and this sector does not tend to shake gently. Objectives would be 32 area support and the 50% Fib just below it and the gap at 31 below that. In an extreme, be aware of the 62% Fib in the region of the 200 day moving average (30 and now sloping upward).
HUI had an anomaly on Monday, which drove it and the HUI/Gold ratio down. Ignoring that, the ratio did drop by nearly 5% on the week and while still intact, should be watched for further indications. As of this moment, it is clinging to ‘intact’.
Gold (daily) is sporting a suspect (at best) looking pattern as it stabbed below the SMA 50. Previously we noted the gap down there below 2200 and also how not too long ago gold bulls would have loved to see 2200 and blue sky. Well, that is what they’ve got and corrections are normal.
Gold (weekly) is flying around in the new macro and it is bullish.
Silver (monthly) is bullish in a different (far from blue sky) way. A pullback to 28 would be healthy and a pullback to 26 even healthier, in my opinion.
Bottom Line
I am not predicting hard corrections in precious metals, but I am keeping us aware that if it continues to that it would be normal, even healthy. Extremes were registered in the gold price, the BPGDM and elsewhere that certainly would permit a solid correction.
But managing a correction in gold is not like managing a correction in risk assets. Gold is not just another asset. It is the anti-bubble, going nowhere at all but reflecting confidence and/or lack thereof in the bubble making machinery (see opening segment). So when a rigged economic data point like the May Payrolls erupts and surprises the market the anti-bubble gets whacked. Gold is a scale of sorts, weighing confidence.
While I may or may not speculate with shorting, cash is the primary holding now and as I often say, I want to feel strong as a buyer. I also want to be well apart from any gold bug herds that spew more dogma the harder the sector corrects. It’s a ritual, after all. It’s a ritual I want no part of.
Gold bullion is important. Silver as well, to a lesser degree (IMO). The miners will be a leveraged speculation upon gold when the bubble ends and gold’s value is marked up as confidence declines precipitously. How long will fiscal authorities be able to keep that implied confidence intact. Again, reference the opening segment.
Commodities
Silver got dinged in relation to gold. Copper got dinged in relation to gold. As one example within the commodity complex, copper miners got whacked and look vulnerable to further downside.
Goldilocks says “let us have none of this inflationary speculation while our authorities in government are trying to create the next inflation problem (and get reelected).”
In support of a level of caution in the commodity complex in the short-term, the TSX-V (daily) got whacked as well. While it is far from losing its intermediate uptrend (it would have to lose the most recent green arrow on the downside at 562.59 and the SMA 200 at 559) there does look like plenty of potential for additional downside from here. We hit target, after all.
This makes me wish I had not highlighted the base breakout of the TSX-V/TSX ratio, which is now under threat. But do you know what? The next time I see something like this, I will highlight it again. That is my job. I tend to be a perfectionist, and in the markets that is an unrealistic way to be. It’s about probabilities, potentials and risk management. Meanwhile, the ratio is not yet broken down as it sits on the moving averages. But personally, I am not buying much of anything until this resolves positively, if it resolves positively. Cash, baby.
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 (account is taxable so I want L/T tax status. But I also want to see if it realizes the big gains I think it has potential for in the next couple/few years.
Roth IRA (non-taxable, no contributions)
Cash/Equivalents are about 92%. I have things going on in personal life, which have kept a layer of distance between the market and myself during the week. I’ll report on this at a later time (it’s nothing bad), but for now let’s suffice to say that a high cash level and less in-week maintenance works well for me. You may well be able to be more hands-on.
I have taken a bunch of profits and limited losses as best I could, and should the market present buying opportunities at around the same time my life outside the markets frees up, so much the better. Meanwhile, cash, baby. And it’s paying for me to have temperance and patience.
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.
