I am fairly well back to normal, sitting in my new office and typing on an actual iMac as opposed to the laptop I banged away on over the last few weeks. We are still moving in, but each day gets better. Our cats, who’d been boarding at a cat hotel for 2.5 weeks, are back and have settled right in. The gang’s all here (cats + wife) and it’s time to get back on track.
NFTRH 821 will not be abbreviated, but it will go stream of consciousness (as opposed to regimented segments) because there is a lot to talk about. Specifically, how our primary plan for the economy and markets is jamming into gear.
Macro Changes
It appears that the next phase we have expected is in progress. That phase is a reaction after the big move in bond yields to the upside. The reaction has been expected to be disinflationary to deflationary. In my opinion we can get similar boom/bust cycles to those that have played out periodically since Greenspan took the system down the rabbit hole of magical monetary policy 24 years ago. But the resulting dovish monetary policy during the bust cycles will not work as well as it did over 2 decades of the Continuum’s downtrend (2002-2022).
During those phases the markets would attempt to go through natural down cycles after previous up cycles, only to be met with a fire hose of liquidity through QE, MMT, manipulation and monetization almost at will and onDemand because the whites of the deflationary monster’s * eyes were clearly in view.
* Deflation is only a monster because a highly leveraged debt-for-growth monetary/financial system cannot handle mass liquidation of its assets, which in the modern financialized economy, IS the economy. A more traditional economy, based on saving and productivity, would take it as a healthy cleaning prior to the next up cycle.
So at this time I think that the broken trend marker (monthly EMA 100/120) will form a battle ground from which proof or negation of the new UP trend in long-term yields will take place. If we are indeed in a new interest rate regime (I believe so) on the macro I would expect much financial anxiety at 3.2% to 3.3% on the long bond. That is the area that the moving average limiters have risen to. It is now a potential Fed panic point to the next down cycle.
One interpretation that keeps coming to the fore for me is that policymakers, formerly perceived as financial heroes (to the asset owner classes) within the ongoing and unbroken Keynesian debt-scheme, will be exposed as third rate parlor tricksters by a bond market that would technically still be in big picture rebellion mode even with a yield decline to 3.2%.
Yields across durations are continuing the topping patterns we noted last week. Meanwhile, the Yield Curve is continuing to posture to un-invert and eventually steepen. With yields declining the curve steepening, said steepener would start out deflationary (a yield curve can steepen under deflationary or inflationary pressure, and sometimes both, during an extended steepening trend.
Here is the daily view of the 10-2 yield curve. Our original view was that the secondary extreme to the inversion was THE inversion low about a year ago. That obviously is still the case. The fledgling 2023 uptrend from July to October then took a good, long sideways test but retained its trend change potential. Recent market stress and the deflationary upturn in the curve is in the process of confirming an oncoming curve steepener.
The yield curve tends to flatten and invert with an economic boom and steepen and un-invert with an economic bust. Friday’s July Payrolls report may have triggered realization for more market participants, but we’ve been noting a trend of slow economic deceleration for months now.
We have also been noting the bottom and base in the unemployment rate for many months. Well, that base is breaking to the upside and looks like a stock that a bottom feeder might buy. Unfortunately, if this base breaks out to the upside and gains traction you can say hello to the new counter-cycle.
The Payrolls report itself was a disappointment (+114k vs. median forecast by economists of 185k), but that is made even worse by its reliance on Education/Health services, mid-summer Leisure & Hospitality services, and you guessed it once again, Government. Also helping the report was construction, which is not productive. It is a service provided to growing economies or launched by government debt spending. The majority of the job gains, such as they were, came from non-productive areas. The Good Ship Lollipop has a wobbling rudder.
Let’s consider the last year as opposed to the last month above. We have noted month after month (except April) that Government hiring was unusually high based on my own anecdotal views of the BLS report over the years I’ve watched it. This year, government hiring – right along with continued government spending – has been… robust is too weak a word. Relentless works better.
Here is the 1 year view. It shows the segments that have done the heavy employment lifting over the last 12 months, instead of a one month snapshot. The trend is embedded Education and Health services first, and unprecedented (in my experience) government hiring second! Oh and that productive economic engine (sarcasm), Leisure & Hospitality, third. This in a supposedly strong economy. No, it is not and it has been slipping for months while the monthly jobs report keeps up some sort of appearances. Somebody tell the Emperor that his clothes are all in the laundry.
Finally, the 20+ year Treasury bond fund (TLT) is definitively busting to the deflationary, counter-cyclical side on the daily chart. I don’t want to buy long-term Treasury bonds despite their likely out-performance to shorter-term bonds, but I do hold Treasury bonds from the 0 to 7 year duration by various vehicles (direct bonds and SGOV, SHY and IEI). The Continuum charts above say that this bull move is within a secular bear market. But again, it is the interim “reaction” move that we are interested in at this time. It is counter-cyclical and deflationary.
Another view of the deflationary winds a swirlin’ comes from the “inflation expectations” ETF, RINF. Nuff said.
But the US Dollar!
Frankly, Uncle Buck looks like a technical mess on the daily chart. I am either wrong about a coming flight to liquidity benefiting the USD or perhaps it just has not happened yet, as a critical mass of investors have not yet manned the life rafts (our operating view is that the current market correction is not yet THE top, after all).
So a weak dollar actually plays along with the view that there could be one more up phase in asset markets before the bubble blows out. At this time USD is reacting to the mirror image of the story that saw it strengthen when inflationary pressure was prompting the Fed to toughen up and go hawkish, tardy though they were.
Weekly USD is compromising its potential base, and important support is at/around 100. One wonders whether the distance from here to there might coincide with a final leg of the stock market bull. One also might wonder whether or not I am correct in assigning to Uncle Buck the historical status of reserve currency and liquidity holder when the market liquidates for real. At this time I will stick with the views we have carried to this point. I do not (yet) buy the BRICS/De-dollarization stories.
US Stock Market
SPX has filled the nearest gap and is testing the first support level. This is the minimum anticipated summer pullback/correction. However, the best and healthiest level would be to drop to fill the gap at 5073.21 and a test of the SMA 200 (5007.65). If that were to happen and turn out to be the corrective low it would make a key higher low to the April low of 4967.24. It could be quite a healthy correction prior to a new bull leg. The other side of the coin says that if that low is taken out, the probability of a new bear market would increase markedly.
As for leadership, the SOX > NDX > SPX chain is implying that the chances for the deeper decline by SPX to test its SMA 200 are in play, if not a distinct probability. SOX has cracked the previous low vs. NDX and SPX. If NDX cracks its previous low vs. SPX we may ride the SPX 5000 Express.
NDX has the look of something with lower to go, judging by the gap down on Friday on strong volume. It is right at initial support but as with SPX, the 200 day moving average is the key area to hold. And yes, there’s a handy gap down there waiting to fill.
And now, the star of our show, the Semiconductor index. SOX is already at a technical buy level, assuming an ongoing bull. It dropped and filled another gap on Friday and this has done good work in bleeding out the momo/FOMO excesses from the sector. However, lose that April low of 4288 and it could get ugly, not just for this market leader, but for the indexes and sectors that follow it. Watch. The. SOX.
In a related matter, we had an NFTRH+ update scouting a buying level for Nvidia (assuming an intact stock market). We are looking for a gap fill and test of clear support, take out the 62% Fib and possibly the 78% Fib.
I would be careful extrapolating NVDA to the SOX and the broader markets because it has got so many men, women, machines, momos, FOMOs and casino patrons of all kinds in its investor base. In other words, what went up harder could come down harder in the very short-term. Making an intact bull market assumption, this would be an opportunity to own the stock you wish you’d owned from January to June.
From the sexy star to the defensive stalwart, let’s look at Healthcare. Now that is a nice looking uptrend in a sector that will likely be relatively firm in the coming bear market.
Its ratio to the broad SPY made a strong and counter-cyclical move last week. Recall that on longer-term charts we have noted a spike in the XLV/SPY ratio into and through bear markets of the past. This bears watching if for no other reason than to determine the answer to the ‘bull rally sooner, bull rally later or no bull rally but instead the start of the bear?’ question.
Volatility has rammed upward, to the surprise of no one who may be caught up in it. This illustrates how difficult it is to be ready for such events. At least for the likes of your letter writer, who is not keen on watching markets all day, every day. I missed shorting this market pullback because I decided to miss it and because it came within ongoing uptrends. Cash is paying out nicely and one day, when the market grinds out a confirmed top there will be plenty of shorting opportunity. Meanwhile, as long as market trends are intact, the higher VIX spikes, the higher the risk to an active bear stance.
As a final note, Dumb money sentiment is not in the full flight it would be at if the stock market continues to correct to the extremes noted above. However, Smart money indicators have eaten the market to large degree and that is contrary positive for stocks. Perhaps the market is readying to rally sooner rather than later. Perhaps, but by the sum of my indications, it’s a close call.
Bottom Line
US Stock Market can move lower by the looks of SPX and NDX. However, the leader, SOX, is already at a logical buy area. Watch the leader for coming firmness or failure. Also, smart money sentiment indicators are buying the market now. It’s a close call between ‘rally sooner’ and ‘rally from lower levels’. There is no technical sign of a bear market yet.
Global Stock Markets
On the whole (ACWX) the global picture is still in correction and still trending down in relation to the US. Items like India are relatively strong and China relatively weak.
Japanese Nikkei got hammered as the Yen spiked with the global stock market route.
Europe cracked downward from the toppy looking structure noted previously. UK took a bit of a hit but is intact. Australia is similar status to UK. Canada’s TSX got cracked to a test of the SMA 50, but as yet appears fairly normal to the existing major uptrend.
Speaking of Canada, for all you speculative junior/exploration resources players, the TSX-V is in trouble. In making a lower high and now a lower low, the index appears to be breaking down. Alternatively, it could be some sort of A-B-C downward correction. But taking out the next low (March @ 541.20) would just about seal its fate. Meanwhile, against a deflationary of yield curves and Treasury bonds, I think I will just sit back and watch rather than speculate here.
Brazil is still in its downtrend, and Asia and EM are getting cracked but are still within their new uptrends. With Japan getting hammered, India is left as the global leader. However, the broad picture is similar to the US; correction not yet indicated over but also a global bear market not yet indicated.
Precious Metals
All of which (opening segment) is to say that the macro is swinging into place for gold stocks because gold is ramming higher in relation to pretty much everything, including inflation expectations. HUI has more often than not followed its true fundamental underpinning over the last 2 years. The exception being Q1, 2024 when we noted a positive divergence by Gold/RINF. Huey soon enough noticed and screamed upward to play catch up.
A majority of gold bugs are focused on inflation, bewildered by the miners’ lack of performance despite obvious inflation problems on the macro.
Gold, they say, is supposed to protect against inflation. So why do the goddamn miners not perform as such? Answer: Because inflation protection is not gold’s primary utility over any particular market phase. Gold miners leverage gold’s standing within the macro, to the upside or down. Since 2003 the majority of time has been spend “to the down” because we have been in a massive bubble in monetary and fiscal policy, always ready to inflate the system at the first signs of trouble. And it has worked, each and every damn time. Monthly HUI/Gold ratio:
Hence why I am so focused on the 30yr Treasury yield Continuum and its message of probability that we are in a new macro, and due soon enough to enter a post-bubble macro.
On the shorter-term, the HUI/Gold ratio got whacked last week but thus far maintains the uptrend from March. As long as that is the case I would anticipate “correction only” for the miners and a buying opportunity resulting from this pullback.
Gold/Silver ratio is rising, which is logical with the broad market and gold sector corrections. But gold is really putting on a show in relation to the headline items of cyclicality like copper, oil and major stock markets. This is a picture of the proper gold mining macro coming into place.
GDX (daily) is nested atop the breakout channel line. That is not to say that it cannot pull back further and test support and fill a gap in the 34s. But if broad market pressure eases, the gold mining sector could pop. As a reminder, we are calling the ‘sub-40 gap fill’ target in the books. If we do get another rally leg I expect it to go significantly further than 40.
HUI weekly checks in again showing a thus far hold of the downtrend line along with the next two targets.
HUI monthly adds perspective, and that perspective is bullish. Monthly RSI is good and MACD just went positive. As noted previously, at any such time as Huey breaks this 4 year old correction the initial target is 375 and the next target is 500. *
* If we really do go post-bubble, deflationary on the macro Huey can easily make new all time highs off of this structure. But there will be a lot of ups, downs and volatility along the way. Suffice it to say I am very interested in the chart above showing HUI in line with the Gold/RINF ratio. It is indicative of a new macro for gold mining, unlike anything we’ve seen since 2003.
Silver (weekly) is still normal to its pattern breakout and next target of 35. Meanwhile it is testing support and could even drop to 26 and still maintain the objective.
Gold is just bulling along. But it is really not doing much of anything other than NOT BEING a risk asset like most everything else. The last monetary thing in the world I am worried about is gold’s ability to carry value and stability into the new macro, regardless of volatility in its price.
Gold bugs have been relatively impaired, price-wise, holding their lump of heavy metal while go-go players made fortunes in Nvidia (a legit company) and scams/promotions aplenty, all made possible by the 2 decade+ bubble in monetary policy and its directive to participants to SPECULATE. So why, at the dawn of what looks like a new macro, should not gold reflect the disintegration of the old ways by being marked up sensationally? Just maybe it should.
Commodities
I am running behind, so let’s speed things up.
Commodities are of course weak with deflationary pressures brewing. I may get rid of what few related items I hold or I may not. Cash is very high and I’ll go day by day. But this is decidedly not the backdrop for a commodity bull. Picture the dismay by the “commodity super cycle” promoters and their herds.
The Fed is now under pressure to weaken its stance as the narrative that it has waited too long to cut rates starts to make the rounds. Any such action could quickly stimulate many markets, including commodities. But that is crystal ball reading at this point. Personally, I am not going to invest based upon what the Fed might do. Also keep in mind that the last two major bear market cycles kicked off around the time that the Fed made its first rate cut. Commodities are part of the risk-on, cyclical world.
If/when I see signs of a market recovery that includes the commodity/resources stuff, I’ll take interest. Until then, I won’t. The macro is swinging deflationary. In that there is a fundamental case for the gold mining industry, but the kind of gold bugs that see gold, silver, copper, oil, etc. as all the same “hard assets” may be disappointed.
- CRB/GNX: Pile driving lower after losing the 200 day averages.
- Oil/Gas: Oil is moving sideways with a bearish bias and Gas is still searching for the seasonal low we’ve noted.
- Copper/Industrial Metals: Copper is grappling the 200 day average at 4.10 and our downside target has been 4.
- Uranium and the U sector remains in correction as the price tracker SRUUF is still below the broken support noted previously and stocks in the sector are utterly tanking. Making matters worse, as we have noted on several occasions there is no visible support for the Uranium price until just below 75. After that, next support is in the 50s.
- I am stubbornly holding MP at a loss despite Rare Earths being hammered along with most everything else. Part of this is do to my heretofore inability to watch markets consistently over the last few week and due to the future view of MP as a domestic (US) REE supplier and processor.
- The PGMs (Pd and Pt) remain weak as does supplier, SBSW. No current interest.
- Agricultural indexes are firmly trending down as the deflation story gains a foothold. Maybe one day soon even the supply chain to your local grocer will stop gouging.
Portfolio
Funds are balanced by gold (long-term risk management & monetary stability).
The new taxable account is primarily cash with a few positions. I did take some losses last week to build up some tax related incentive to take future profits.
Roth IRA (non-taxable, no contributions)
Cash/equiv are at a comfortable 90%, which is where I’d wanted to be if/when the market correction view played out. It is here and now the question of its depth (per the report above) comes into play. Favored sector is gold mining, with an interest in Semiconductors for signaling, if not investment, and a relatively positive view of BioPharma, Healthcare in general and other defensive areas. Also of note, the defensive, dividend paying Utilities sector, which I hold in the taxable account, has ticked a new all-time high.
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.
