US Stock Market (per last week): Little change. Bull trending with leadership intact amid very concerning breadth divergence and sound asleep risk indicators (meaning high but unrealized risk).
US Market Sentiment (per last week): Sentiment has backed off to the degree that could support markets in the short-term as the “last chance power drive” rally continues. But longer-term sentiment is very unhealthy, contrary-wise.
Market Indicators (per last week): Sedate macro indicated. High risk macro also indicated, by definition.
Global Markets (per last 2 weeks): 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 (2 weeks ago): Correction has come from gold’s target of 2450 and below the targets for silver and the miners. But the sector did register 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. Per last week: Good work being done to the downside, but correction not yet indicated over. There are valid levels lower.
Commodities (per last 2 weeks): 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. NEW: Watch the GSR/GCR/USD combo and also the likes of the TSX-V (for indications in the commodity/resources patch), which is in hard correction but not yet broken.
Currencies (last week): USD decision point decides “up”. Now, if the Gold/Silver ratio’s ‘V’ bounce turns serious these two could wreck markets for a while. As yet, the GSR is merely bouncing. But it should be watched closely. NEW: USD strengthens further and the Gold/Silver ratio held serve and the Gold/Copper ratio was firm. If these three continue to rise caution is indicated across many markets.
Can Bad Breadth Be Good?
In a word, yes. But first, bad breadth will likely be… bad.
A subscriber sent me analysis calling for a “Monster [bullish] reversion trade for the ages” based on the extreme under-performance of the Equal Weight SPX (RSP) to the Headline SPX. The writer’s conclusion is that after such an extreme divergence the spring back in RSP vs. SPY/SPX is strong and the broader market is the place to be for out-performance.
Can’t argue with that.
Here is the daily chart of Equal Weight/Headline comparison we often review along with its bearish implications (divergence) prior to the last two bear cycles. I have added the nominal view of RSP for context. True enough, after the market corrections Equal Weight sprang back to out-performance mode. The lesson is you want to buy the broader market after a previous cycle has thinned out to the headliners and then finally the whole mess tanked.
But the key here is “after the market corrections”. The analyst projects “monster” gains for the broader market because the ratio at top has tanked to the degree of previous extremes that preceded “monster reversion trades.”
I have a distaste for terms like “monster”, “rocket”, “a train leaving the station”, or the media’s “investors cheered” [insert here whatever eyeball harvesting news of the day triggers the cheer]; not to mention others like the “got gold?” jingle and the commodity “super cycle” that has been coming any day now for the last 16 years, the “Great Rotation”, the BRICS “dedollarization” pitch … and a whole host of other nicknames, jingles and promos that instigate greed and emotion in investors.
So let’s throw away the word “monster” and simply review the situation. The analyst is correct, bottoms in the ratio have indeed preceded periods of broader market out-performance as the market seeks equilibrium AFTER a negative divergence like today’s has already tanked the markets, broad and equal weight alike. So it would appear that an important qualifier was omitted. Indeed, the article’s view is that it can keep going.
Here’s the bottom line: The stock market rally can keep going. Better yet, all stocks should begin to participate in the coming months…and years.
Market breadth readings indicate an undeniable truth: most stocks in the S&P 500 are vastly underperforming a handful of mega-cap behemoths.
Since 2007, this trend has rarely lasted long. More importantly, the setup is incredibly bullish for the under-loved stocks in the market.
If history is a guide, we will be looking at a monster reversion trade where the equal weighted S&P will play catch up to the market bellwethers.
Well of course, it “can” keep going. This market with its crossed signals and failed (or at least delayed historical quants) has been a challenge. Like riding a bucking bronco or worse, a nasty and pissed off bull. But the fact is that when coloring the above analysis with actual historical facts, the RSP/SPY ratio negatively diverged during phases where the nominal SPY, and RSP for that matter, were rising. Just like today.
The big bullish “monster” trade [even there, I see no monster, just healthy broad breadth leadership] did not materialize until after widespread price damage was done to most markets.
The writer uses 2007 as the historical ‘look back’ period, so lets widen our view. Never in the history of this view has the “monster” bullish signal come about while the nominal stock market was still rising, let alone making new highs. That seems to me to be an important qualifier. The big reversion trade in 2009 came after a pervasive market crash. The big reversion trade in 2020 also came after a market crash, of sorts.
Now, let’s take it a step further. You may recall that the fact that RSP/SPY was rising during the supposed bear market of 2022 aided our view that it was not a real bear market but rather, an extended correction. RSP/SPY was a positive breadth underpinning. So for the sake of integrity, you need to know that I will call what I see, not what my dogma sees.
What I saw in 2022 was positive beneath the surface. What I see now is an as yet unrealized negative divergence to the stock market as a whole. The implication, based on history, based on quant, is that sure the broad market may well play catch up to and out-perform the sexy headline stuff (cough cough Nvidia, cough cough Microsoft…). But it will do so AFTER the current divergence and thinned out market resolves into a bear market, including the broader stuff as represented by RSP. So yes, I think that’s an important qualifier, don’t you?
US Stock Market
Of course, if one of our main themes plays out this pig actually “can keep going”. Pre-election noise is ramping up nicely with the first presidential debate this week. Payrolls have held up with a ton of embedded services and government hiring. GDP is propped by a bag of debt that is helping keep up appearances with every unit of GDP leveraged at 120% debt…
…and our ongoing sleepy (by definition, high risk) indicators like the not yet un-inverted yield curve, the 2yr yield divergence to the Fed proxy T-bill yield, VIX asleep on the floor, High Yield spreads sleeping right next to VIX, Libor/T-bill and other signs of a calm, complacent backdrop.
In conjunction with that analysis, we also note that market leadership is intact by the SOX > NDX > SPX chain. Aside from a generally bullish implication, this also tilts toward the more Tech/Growth oriented Goldilocks stuff. The stuff that is not impaired when inflation signals start to fade, at least not initially (if disinflation were to proceed to a deflation scare that would be a different story).
Market sentiment continues to lean over-bullish, but the larger over-bullish picture is subject to little twitches like how dumb money recently backed off while smart money ate the market. We have witnessed such minor adjustments in sentiment sustain bull rallies in the past, and it’s been happening in the current situation as well.
NAAIM (Investment Managers) remains elevated but not nosebleed over-bullish at 85% bullish.
Investors Intelligence (Newsletters) bull/bear ratio is a firmly (though not extremely) over-bullish 3.42.
AAII (Ma & Pa) started eating stocks again for a firmly (though not extremely) over-bullish 1.97 bull/bear ratio.
US Stock Market Bottom Line
Market sentiment is aligned with the sleepy risk indicators. “It’s all good” is the implied thinking of the average market participant, as long as she is long the indexes or Nvidia, Microsoft, Apple, etc. It is not really a stock pickers’ market, although one day after the bearish and then bullish implications of the Equal Weight (RSP) divergence play out we may well be able to pick stocks aplenty. Sectors too.
To this point, with the market trying to decide between intact economy and weakening economy, diminishing inflation signals and still persistent stickiness of inflation’s effects and oh yes, a big, absurd and noisy election ‘for all the marbles’ upcoming, it is little wonder that a new and consistent market theme has not yet come about. One month the inflation trades pop up, the next it’s back to Goldilocks and Tech.
This is a market that is just begging to have its pipes cleaned out as it is constipated with so many inputs, from monetary and fiscal policy at odds (Fed trying to maintain hawkish appearances while government merrily stimulates full speed ahead) to terrible breadth, unhealthy sentiment and all the while, the economy fraying around the edges. I will tell you this, it is an election year that I am going to pay close attention to because I have injected politics into NFTRH analysis like no other time in the past. I actually want to hear what Trump is saying and I also want to hear what Biden’s handlers are instructing him to say (and hoping he can say).
Our theme continues to be that this mess can be held together to and through the election. That would be the goal. We are running out of time for an interim correction of much significance. If a healthy correction to clean the market for a drive into Q4 is going to come, it needs to come in the next month or so, assuming typical time frames for corrections and rallies.
Of course, two other options are viable.
- Market just goes up up up… into the election. Oh how unhealthy the aftermath could be.
- Market corrects before the election and simply does not come back. Bull over.
As yet we’ll stick to the plan. The market, subject to interim corrections/pullbacks, is eyeballing the November US election and it is being supported toward that goal by fiscal authorities, risk and all.
Global Markets
Once again, at a time when I am personally not very interested in much of anything other than protecting gains to this point and a little speculation here and there, I don’t want to try to cast a net out over the world. You know your local country or region better than I do. Frankly, with the US dollar firm lately, I don’t really want to know right now because the world, on balance, tips to the anti-USD side of the scale.
With a strong dollar and the at least temporarily failed signal of the Canadian TSX-V/TSX ratio (see Friday’s trade log), not to mention the potential that the Gold/Silver ratio could rise (all per Friday’s NFTRH+ update) I think that the USS Good Ship Lollipop can maintain global leadership as aspects of the US market benefit when a strong USD pulls in global capital.
Speculative Global Commodity/Resources Trades
Speaking of da ‘V’, while its relative stance to TSX has broken down in a negative sign for the speculative end of the commodity/resources space, its nominal chart spiked down for a test just above the daily SMA 200 before hammering back upward on Friday. It is possible that may have been a final flush in the correction that began after the index dinged our target at 622.
I am holding off turning the black arrow green however until a clear low is put in place. Recall that last week we identified the March low of 541 as the key level not to be breached as it would be possible for the April low to be taken out without major technical damage. All in all, it’s “rally intact” for da ‘V’ as long as it holds 541 or higher.
Let’s tuck in a bottom line on the commodity/resources trades here. I am watching the TSX-V closely as well as commodity indexes/ETFs. For example, if GNX were to climb above the daily SMA 50, which it dropped below on Friday, and take out the intermediate downtrend line, we’d probably have something cooking. But short of that, this chart biases bearish. Hence, I am in no hurry to speculate. Goldilocks is no friend of commodities and if the broad market actually correct, commodities will very likely not resist its pull.
Precious Metals
With my relatively light set of holdings, happily collecting cash/equivalent income, I took a spec shorting gold stocks via DUST. It didn’t work as a profitable position was held a little greedily looking for more gain even though GDX had dinged the 38% Fib level, the first viable bottoming point.
However, this is not a great technical picture by daily chart. Indeed, if you value unfinished potential chart patterns, it’s a potentially poor technical picture. Down volume has been outpacing up volume and that is not a positive profile. So GDX has Fibbed to 38%. But that was just the initial support area, not what I considered the best support area.
If the H&S pattern imagined here activates by breaking the green dotted neckline, the measurement is to the area of the 62% Fib and the 200 day moving average, each just above 30. That would also fill the upper gap (31) we’ve had sitting there as a target as well. Not a prediction folks, but if I’d not have been so busy over these last several weeks and had time to really look at this chart I’d have probably held on to DUST, if not increased it.
Well, there’s always next week to evaluate how it plays out. Take out the SMA 50 (which held as resistance on Friday) on the upside and while watching for the potential of a right shoulder to form I’d be equally as open to “correction over”. Otherwise, the longer it holds at/below the SMA 50 the more tentative the short-term technical situation becomes.
Gold remains in the same unattractive pattern we noted last week. It jerked above the SMA 50 and right back below it. Still watching the gap at 2222. Also note the 200 day average rising. It should meet that area in a couple months or so.
Silver got me a little whipsawed as it rammed upward on Thursday and back downward on Friday. That’s the kind of stuff that adds to the lore of the mythical Mr. Slammy, tormentor of gold and silver. Silver is perched above the SMA 50. Maybe Friday was nothing. But if it was something and that something was bearish, we’d be looking as low as the 26s for silver and a potential fill of that little breakout gap. *
* Although that is a breakaway gap if I’ve ever seen one, and does not need to fill.
Bigger picture, little has changed. The macro is in progress, not complete. Gold’s target is 3000+, silver 35 and then one day maybe to take out the old high of 50. GDX’s initial target is 40 to fill that gap. HUI (monthly) did not quite reach the channel top or the 300 overshoot level before recoiling. Backing out short-term noise, it is still a picture of a mother of a corrective consolidation within a bull market. While I do not have a handle on sequences or time frames, the anticipation is for a break of the channel, a test of resistance at our old long-since registered target of 375 and ultimately, the 500 area. Monthly RSI and MACD continue to look coiled and positive.
Speaking of the macro, gold is still trying to recover in silver terms and if both metals continue in correction mode, that would be negative for the commodity/resources trades, including gold stocks. I got a little grabby with a couple copper stocks last week but the Gold/Copper ratio begs me to keep a close on that. Yes sir GCR, I will.
Gold is trending up but consolidating in oil terms and is neutral and correcting in SPX terms. In relation to global markets, gold is a little better (makes sense since global is also trending down in SPX terms) but firmly in consolidation. All in all, it’s an ongoing incomplete macro picture with some persisting Goldilocks tones.
Precious Metals Bottom Line
We will continue the recent theme of not digging up every last indicator or focusing on stock charts at a time when it looks like the correction has the potential to continue. The big picture is “bull market” for gold, and in slightly less obvious fashion for silver, and even less obviously in gold miners. The short-term is in correction and there is no clear sign that the correction has ended yet.
Beyond that, as you can see by the Gold/SPX ratio, the macro has not yet turned favorable. It is in progress. But this election year (for all the marbles) is a spanner in the works. The Fed is still paying us 5% in order to be safe. Gold is a super long-term hold for me. The rest of the sector is the play that could bring in a lot of worthless paper that can be converted to gold (or property, resources, etc.).
It is advisable to tune down the perma-hype of the sector that always wants you long and optimistic in “GOT GOLD?” fashion. This is a war, not a jingle. The object of a war is to survive it, to not become a victim of it. At some point the “play” will resume. That will be fun. But the play has been “patience” since the sector became overbought in May.
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 87%.
As a man who stares at charts, I am aware that the chart of my IRA is flagging. Thus far it is a bull flag, but with cash paying out to the degree it still is, I am not going to let the flag break without raising more cash.
Never much of a day trader, this spring and summer I am even less so, as a big time commitment outside of the market has me in its grip (it’s fine), and will continue doing so for a few more weeks. I am actually enjoying the built in risk management of cash and looking forward to August into year-end. And an interesting year-end I think it will be. For now, I want to remain positioned in such a way that I don’t need to be watching closely during the week.
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.
