This should be the last abbreviated [edit: upon completing the report, while not overly detailed, it’s not what I’d call an abbreviation] edition of NFTRH, assuming we get settled in to the degree expected this week (I may still be a bit disconnected from the markets). It has been 5 months of prep, hard physical work and chasing what seemed like infinite details in order to complete the process of selling our home and moving. Never again, says I.
When I informed my wife that “we are selling” she looked at me with what looked like a mix of fear and contempt. Turns out she instantly foresaw how difficult and stressful it was going to be while I only found that out through the experience of it. But we made it work with her superior planning and organization abilities and my ability to do dumb, heavy work and execute many required routines, sort of like a well trained chimp.
On the plus side, from our temporary living situation we are enjoying the ability to walk to the bar across the street, the restaurants all around and for exercise, the “Greenway” path from here in Watertown, MA to Fresh Pond in Cambridge, without being tormented by a single bug! Seriously, the bugs out in the sticks were a primary motivation (among several others) for leaving. Skeeters aplenty, dive bombing Dear Flies, May Flies and worst of all, yellow jackets that come out of the ground and sting the allergic likes of your letter writer, who’s had a couple of literal near death experiences compliments of these little bastards.
Ah, but now we move on.
US Stock Market
VIX has spiked, market leadership (Semi/Tech) has come under stress and the 10-2yr Yield Curve has elevated (but remains inverted) in signs of short-term stress. But High Yield spreads are sound asleep, the trends in leadership (SOX > NDX > SPX) are still up, as are the trends in nominal stock indexes. In other words, all this can be called at this time is a summer correction. Reading more into it than that would be (bearish) wishful thinking.
This could of course be the start of the massive bear market promised to be right around the corner by the usual perma-bear suspects for years now. But our discipline should be to keep in mind that the trends are the trends as long as they are the trends. They are up. And so there is another option, which has been our preferred option… for a healthy summer correction to refresh for a perhaps final drive to or through the US presidential election.
Then we will also finally be on watch for a significant, possibly even massive, bear market. “On watch”, not predicting because supposed gurus making predictions tend to lead their herds astray. People refining probabilities and managing risk tend to do better.
Personally, I have a watch list of items to consider adding should this be the expected correction (only). Meanwhile, let’s look at some indications and internals.
Sentiment Snippet
As you can see, Dumb money indicators are still on a moderate fade from a manic spike in enthusiasm and Smart ones eating the market, as if they think that the summer correction would be merely routine and ending soon. As it stands, sentiment in general has been reset from briskly over-bullish to a point where the rally can resume. But readings have not dropped to the point of a “very healthy” correction, which could see indexes testing their 200 day averages (ref. SPX chart below).
Bond Market’s Bad Chicken
The bond market has stalled in its inflation signaling as nominal yields look to be forming topping patterns. With the yield curve posturing to steepen, the signaling is a deflationary steepener, not an inflationary one. Or at this time let’s call it a more benign disinflationary situation, which could give Goldilocks one more helping of porridge.
Our interim plan, based on the above, is and has been for a fade in inflation signaling by the bond market along with a tell tale decline in yields. If the process continues as expected bond yields will continue to ease. Within that easing (disinflation) could come a resurgence of the stock bull with a Goldilocks bias toward Tech, Growth and even the broader measures of the market’s previously poor breadth, like small caps, which are theorized, if not proven, to prefer an easing interest rate environment. More on that last part in a moment.
But first a review of the bigger picture situation in bonds/yields. The 2022 trend break in the Continuum (top panel) meant something. It might have meant a new age of inflation or it might simply mean an impairment of policymakers’ (monetary or fiscal) ability to inflate and sustain asset bubbles in the future as they so routinely did in the past. In other words, an impairment of their ability to effectively stave off deflation. Either way, inflationary or deflationary, it’s gonna be bad chicken and it’s “not gonna be good for anybody.”
However, we are still actively managing the interim, not yet the big picture. As noted above, the bear could start at any time in such a risky environment. But my gut goes with our preferred theme, which has been that fiscal efforts to keep the economy limping along can be perceived as bullish (enter last week’s “surprising” GDP report) by a manic FOMO market that WANTS to be bullish.
Jordan Roy Byrne, last week regarding the yield curve: “Is there any way it could seriously steepen and there not be a recession?”
Gary: “I don’t think so. But my one reservation is that the bond market we have now is different from the bond market we had for 2+ decades. So many rules have already been elongated, if not broken. So we need to guard against automatic thinking and be open to new rules.”
There are a lot of macro indicators flashing warnings as they did at times of oncoming disaster from 2000 to 2022. But in 2022 the Continuum (above) broke trend and ever since then we’ve been trying to refine interpretations and implications of what to me is a profound picture. So in a time where people are trying to rationalize why the economy remains firm and the market remains bullish, we should give just a bit of credit to the idea that it could be different this time. A new era of prosperity and uninterrupted bull.
However, I am going to stick with the view that the indicators are being elongated, delayed, stretched and that when the elastic band finally snaps the disinflationary backdrop is going to whip deflationary and risk off. And oh by the way, the yield curve has not even un-inverted yet. The preferred view remains that we are in a bullish but ultimately doomed market and economic phase.
As to the here and now, much has been made lately about the market’s improved breadth. If you look closely you can see the spike in RSP/SPY. A spike within a hard downtrend. You can also see that as the S&P 500 has declined recently, Equal Weight (RSP) has actually risen. The machines are dumping Nvidia and Microsoft and a rotation is in play.
Small caps and other broader measures of the US stock market may continue to gain a relative bid as interest rates decline or the market could just be shaking the flees off before a perhaps final drive, led by the previous leaders in Semiconductors and big Tech. Either way, I do not view this little revival in market breadth as anything bullish beyond our already in place view of an ongoing bull that could go to or through the US election.
Just as we should beware acting aggressively on all too believable and rational perma-bear stories we should also beware perma-bull FOMO instigated rationalizations about why it is different this time. What we should do is take the market in chunks or phases and evaluate along the way. The current chunk is the anticipated mid-summer correction with the capability to refresh the bull for a perhaps final drive into or through the election.
As to the summer correction, SPX is testing the SMA 50. That qualifies as a moderate sentiment reset and potential bull refresher. However, a more dramatic and potentially healthy correction could drive the index down to the 200 day moving average and a fill of the lowest of the 3 open upper gaps. In between there are two other gaps that could fill. This week should be interesting.
Global Stock Markets
Global (ACWX) is in line with the US although still trending down in relation to the S&P 500. For reference, ACWX is also in a long-term downtrend in relation to Equal weight SPX, so the global under-performance is not just due to the big players stacked within the headline SPX. However, ACWX is nominally intact as it tests the first support level we have noted. As with US stocks, a moderate summer correction has taken place, but a very strong (and potentially healthy) one could drive the ETF down to the up-trending SMA 200.
Precious Metals
As gold works off its overbought status and silver gets clobbered to an oncoming buying opportunity, the macro picture is still in progress as Gold/Silver spikes with the sector correction (as it often does), Gold/Copper indicates bad things for the global economy, Gold/Oil indicates decent things for the gold mining industry and Gold/Stocks indicate a backdrop not complete but in transition to a macro that will be negative for most sectors and thus, investors, and positive for the unique sector, gold mining, and its investors.
GDX daily bear flagged and then dropped on Thursday as it thus far holds the upper channel breakout point (a version of which is more readily viewed on the weekly HUI chart below). It is thus far a mild correction. But below lurks the SMA 50 and below that a gap (34.35) at short-term lateral support. One would think that is a viable objective for a healthy correction.
HUI (weekly) is attempting to hold the breakout line. But here’s a reminder that unlike many TAs, I do not not place a lot of importance on trend line breakouts. Frankly, they fail often. That said, it is a minor technical positive.
HUI monthly shows what could be yet another candle retrace back into the channel. But at some point before long I expect Huey to be done with this now 4 year long correction and start to rampage to the upside. As a side note, monthly RSI and MACD look quite good, positive and coiled.
Since GDX came within a whisker of the “sub-40 gap fill” target I want to put that aside now and focus on HUI’s resistance at the 2020 high of 373 as the next objective. But if this is the bull market I think it is, Huey will not stop there. It will make a higher high. The long held target of 500 could well be the next major objective when the trend channel is taken out (assuming the view of an ongoing bull market is correct).
Gold held its 50 day average on Thursday and Friday and is technically intact at 2387. With silver breaking down for a deeper correction we should be open to gold potentially following the leader. However, intact is intact and speaking personally, I do not micromanage the price of a monetary value instrument.
Silver tanked the thrice tested support area at 28.60 after we noted in NFTRH 819 that the more times support is tested, the weaker it tends to become. Current price is 27.91 and this breakdown theoretically targets the up-trending daily SMA 200 (25.87).
Considering the view that gold stocks are only making a normal correction within a bull market and are maintaining trend by the HUI/Gold and GDX/Gold ratios, this pullback – whether mini as has already come about, or maxi to wherever the sector is at if/when silver hits the 200 day average – is a buying opportunity. It could be the last significant such opportunity for a while if HUI breaks the 4 year corrective channel.
Commodities
Copper and Industrial metals are diving hard to what appears to be a bombed out buy. This is especially true for the complex (GYX). Watching closely now.
Crude oil is going sideways during a seasonally positive time and NatGas has declined hard into what on average is a seasonal low. The sector (XLE) may be forging a new uptrend after a decline from April to June, leading the commodities.
Uranium sector has plunged to generally below its 200 day averages. The price tracker, SRUUF has slipped support. I’ll continue to watch the sector but let it be for now until some technical reparations are made.
Palladium and Platinum robo-downtrending and hard down from a previously constructive stance, respectively. Little current interest here as well. SBSW is the watch item.
In the Rare Earths patch MP, LYSDY and REMX are all trending down. I hold the first two for a long-term bottom feed, but will not have unlimited patience.
The Lithiums (ALB and ALTM) have been hammered and are trending down. This is testament to the intensity of the EV hype we had to endure back in 2020-2022.
The Ags have spent the last month getting obliterated. I did not notice due to my less than ideal situation for market watching. But it sure does dovetail with the fading inflation theme.
Portfolio
Funds are balanced by gold (long-term risk management & monetary stability).
The new taxable account is very heavy cash/equiv, collecting income and awaiting opportunities to add positions. With cash still paying out at 5% and shorter-term Treasury bonds viewed to be positive in the coming months there is no hurry to position on my part. Positions are in order of size.
Roth IRA (non-taxable, no contributions)
Cash/equiv are at 89%, once again nice and comfy (and paying income). The report above illustrates potentials for markets to arrest the pullback from current levels, in which case I’d reluctantly ease in to more positioning. But the report also illustrates deeper pullback levels (broads and precious metals) that are very possible. Those levels, within a context of ongoing rallies, would be a more committed buy potential for the to/through the election view.
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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