Summary
US Stock Market: A hard correction has finally visited an over-bullish, high risk market. There are positives and negatives w/ respect to the “summer correction or bear market?” question. Until the trends change from up to down, we stay with the “summer correction” plan.
US Market Sentiment: Sentiment indicators moved low enough to end the correction. However, very short-term indications allow for some additional downside/bottom testing/grind.
Global Stock Markets: World (ACWX) still trending down relational to the US. Generally in the same short-term condition as the US. It’s a global bull market that would come under pressure and in some of its aspects, go bearish when the US enters a bear.
Precious Metals: The macro-fundamentals are progressing with gold now handily out-performing commodities, and especially copper. Gold vs. stock markets is in progress but not there yet. In the short-term the sector is fine, albeit still in a moderate corrective mode. Longer-term, we look for gold to shine in relation to most cyclical assets and for the miners to leverage that relationship.
Commodities: The TSX-V is among other things, an indication on the commodity and resources trades. It is flat out bearish. Little interest in the inflation trades until da ‘V’ either hits the 503 area target or negates it. It’s a deflationary backdrop developing, after all.
Currencies: The USD got hammered along with most everything else as a condition of bear phases past reared its head: the unwinding of the Yen carry trade. Most global currencies are still either neutral or trending down vs. USD, but Euro/USD is in an interesting and potentially bullish pattern.
Gold/Silver & Copper Ratios: The GSR is doing its job to pressure markets as USD stumbles. In this case it is the GSR and YCT (Yen Carry Trade). The Gold/Copper ratio is extremely strong and flashing very negative things for the economy and markets, whether sooner (as in the current correction) or later (as in a bear market starting in the coming months).
US Stock Market
The question is still open. Summer correction to clear the pipes for a drive into Q4, or the start of the bear market? Our favored plan is the former, but I certainly respect the latter.
The SPX daily chart holds mixed messages. On the bearish side, it could be in a bear flag as it rises on declining volume in the short-term. Oversold RSI has reset to near its EMA 20. It was oversold and a bounce was going to happen sooner or later. It is happening now. Resistance is just above, beginning at 5397, where the declining EMA 20 (dotted line) meets short-term lateral resistance. Finally, there is still an open downside gap at 5073.
On the positive side of the ledger, there are two upside gaps that can fill. The lower can fill and still hold below the SMA 50 and generally, resistance. The upper gap would be the gateway to a next leg up scenario. Other positives are the market’s trends, which are up on all but short-term time frames, as you can see by the SMA 50 and SMA 200. Finally, if this was an A-B-C correction within an uptrend it has done what it needs to do, with the heavy ‘C’ leg down having been the low.
Yet all this can be called to this point is a bounce. Before long, SPX should select one of the above options. Right now it’s a tough call. SPX could make a marginal new low without entering a bear market. The bear market signal is the April 19 low of 4953.
NDX filled its downside gap, unlike SPX. It is bouncing to try to fill the first upside gap with some resistance at that gap area and clear resistance at the SMA 50 (19402). Above that reside two more gaps that were left as first the machines, and then the herds sold big Tech stocks hard. As with SPX, all this can be called so far is a bounce.
The Semiconductor index has not even taken out initial resistance yet as RSI resets to its EMA 20. SOX avoided a bear market signal by the hair of its chinny chin chin. Since we have viewed SOX as the market leader much more often than not since 2013, I see no reason not to continue doing so at this time. The correction so far has been a hard sell down on a cyclical sector that has its hands in everything from smart devices to medical equipment to war machines.
The SOX > NDX > SPX leadership chain is little changed from last week. It got hammered, but not necessarily broken. If we consider that the key low in the SOX ratios may have been the October, 2023 lows, we’d focus on NDX/SPX to see if it holds the April lows, unlike SOX/NDX and SOX/SPX. US market leadership is under pressure, but not yet clearly broken.
Thoughts On the Market and Bottom Line
The above are charts. They tell what they tell. Our favored plan (for a summer correction within a bull that could run to/through the election) was born of experience and just a bit of logic. The market was overbought, over-loved and high risk as we had been stating for months. But in my experience, a long-term top does not tend to come with the media so on it, telling us in real time how bad things are. The media tell us after the fact and continue to pound matters after the fact.
The August 5 lows saw the media playing the story to the hilt and in the case of FOX News, blaming it all on the democrat presidential candidate. Never mind that they mentioned “inflation” about a million times and “deflation” not once, even though what happened over the last few weeks was disinflationary/deflationary in nature. Never let a good buzz word that the public will eat up go to waste.
Of course, our view since December-January has been that ‘duh, the Biden admin is doing all it can to secure the election by keeping an economy that desperately wants to fail, alive (FrankenConomy) just enough to print GDP numbers that will not gross out the markets (and voters). Relentless government hiring and debt spending on favored projects/sectors/initiatives has seen the admin desperately trying to keep things afloat in 2024 as the Fed sits on its ample butt and contemplates whether/when to roll over dovish.
None of which means they (the admin) have to succeed. But it’s their plan (I assume) and it is my plan as well, given that it is taking place within UP trending markets. Let’s always keep that in mind. When the market changes trend, very roughly by losing the 200 day moving averages and then the April lows, we will alter the plan. It’s really that simple. This is how I manage markets; by what I see and by parameters I set. I don’t manage them by what I think or what my bias thinks.
US Market Sentiment
Smart & Dumb money indicators: The balance of the views below show that Dumb money became as bearish as it did at the April correction, which was a low prior to a rally to new highs. Smart money has risen even higher than that low. The general implication is that a green light (from a sentiment standpoint) to end the correction is in play. However, the very short-term risk indicators are elevated. What this might mean is that even if the corrective lows are in, there could be some grinding or even a sharp pullback in the very short-term.
Investment Managers (NAAIM) had ticked to leveraged over-bullish (100%+) on four occasions, with three of those resulting in corrections of some consequence, including the current correction. However, their sentiment has remained above previous troughs and that could represent a vulnerability, at least in favor of what was mentioned just above, that there could yet be some short-term grind and bottom testing in the very short-term.
Investors Intelligence (Newsletters) have taken a sharp drop as of August 6 with a Bull/Bear ratio that has dropped to 2.5 from a previous extremely over-bullish reading of 4.4. This is permissive of a resumption of the bull.
AAII (Ma & Pa) have pulled back to a Bull/Bear ratio of 1.08 from a briskly over-bullish 2.2. This too is permissive of a rally resumption. Generally these two indicators are telling similar stories to the Dumb money graph above.
Global Stock Markets & Currencies
The World (ex-US) took a hard test of the SMA 200 and the April low and immediately reversed upward, in-day. So, despite that lower low it has held, along with associated support and the SMA 200. Now ACWX is at resistance. A key moment.
The usual adversary of global markets (and commodities, precious metals and to varying degrees, US markets), the US dollar, was not the culprit on this broad global market correction. Indeed, USD (DXY) may be in a short-term bear flag of its own as it deals with the developing dovish Fed story and…
…the unwinding of the Yen carry trade, which saw the Japanese currency scream higher in relation to the global reserve currency. Evidently, the carry trade is still a thing.
Global currencies also tanked badly in relation to the Yen. Hence, currency-wise this global market correction was/is definitely a Yen thing. CADUSD (Canada) is trending down and AUDUSD (Australia) is neutral at best. The Swiss Franc and its reputation (which is more folk lore than reality) of being nearly as good as gold is bullish in relation to USD and the EURUSD (Europe) is actually postured in a pattern that could resolve bullish. Dear European subscribers, you might tell your friends that NFTRH may be going on sale in your local currency if this pattern breaks out. :-)
Finally, since NFTRH has a good amount of subscribers interested in junior resource stocks, let’s update Canada’s TSX-V for that as well as its indications on the wider inflation trades. The technical news is not good. An H&S topping pattern developed and broke down below its neckline, which was at the converged 50 and 200 day moving averages, making the breakdown even more significant.
In hindsight, the volume spike up to our previous target of 622 was a topping signal and the implied target of the current pattern sets its sights on filling the two lower gaps, which we have had on radar all along. The target is 503. Markets go and markets go down. If they do so to our pre-planned targets, so much the better. This is poor short-term signaling for commodities in general and the inflation trades.
The broad market correction is not yet signaled to be over and an impairment of commodities and resource trades (in light of the deflationary winds that are blowing) is indicated. A pertinent question is whether or not the precious complex has un-tethered or will un-tether itself from the inflation trades…
Precious Metals
Arguing for that prospect is the Gold/RINF ratio, which we’ve kept an eye on over the last several months. The ratio closed the week quite positive (as it should during a disinflationary/deflationary time) and as such, is also sporting a minor positive divergence to gold stocks (HUI). The question now, in my opinion, is ‘have we bled out enough inflationist gold bugs yet?’
The Gold Miners Bullish Percent index shows a sector that had become briskly overbought before entering a thus far moderate correction. It is certainly capable of indicating further short-term downside for gold mining stocks, but the caveat to that is that the sector is in a bull phase now. Considering that and the fact that we are likely in a different macro than we were over the last 20 years, I take nothing for granted. This indicator could remain overbought indefinitely. As to the current macro, Friday’s public article updated the details.
Notes:
- HUI/Gold ratio is intact to the rally that began in March.
- The deflationary macro signaling is positive for the long-term fundamentals of gold mining. However, it also represents a potential vulnerability if too many inflation focused gold bugs start selling along with other items in their baskets of “hard assets”.
- The Commitments of Traders for gold and silver are still showing brisk investor bullishness. This is normally a caution signal, but with a new macro and a real bull market, CoT can remain extended and even increase in bullish sentiment indefinitely.
For a picture associated with that last statement, note how long gold remained pegged to an over-bullish structure from 2009 to 2011, as the metal rose steadily. As Old Turkey said, “it’s a bull market, you know” *, and gold has been in a secular bull market since 2001, as hard as that is to comprehend. The bull market was interrupted by a cyclical bear from 2011 to 2019.
* From the very worth your while book on trading, Reminiscences Of A Stock Operator.
As to the CoT data, the blue line is the briskly bullish large speculators, the gold line is the moderately over-bullish little guy (like me and maybe you), the red line is gold producers and the green line is the dreaded “banksters”, “cabal” and other forces that gold sector ghost story writers want to scare you and make you emotional about, known as “swap dealers”. The other pitch that sector story tellers and eyeball harvesters like to talk about is that the commercial swap dealers are “smart money”. Well, if that is the case, they sure are dumb for long stretches of time.
The commercial traders, are always on the other side of the speculators’ positioning. It’s just the way that the CoT works. Try not to fall for emotional bullshit. And folks, I get as emotional as the next guy in some ways. I just manage it because I have learned it’s the only way to operate in these markets.
Silver’s CoT is less extreme by the readings of the large specs (blue). It is certainly capable of much more upside before a rally killer reading comes into play. But silver is not gold and has been more restrained than the monetary metal above. That is because silver is a precious metal/commodity cross-dresser. We have noted that important support is in the 26 (+/-) area. As a side note, silver’s swap dealers (green) and producers (red) are similarly aligned net short, as opposed to those of gold, above. Not sure how to interpret that, but open to opinions.
Bottom Line
The precious metals sector remains in a larger rally mode, despite the recent corrective activity. This is much like the broad markets, which is actually a still a bigger picture negative with respect to what I think will be the case once stock markets get ruined for all to see. That would be the post-bubble, deflationary pressure that uniquely benefits the gold mining sector for a longer-term phase than the quick bursts of the last two decades.
As for the gold miners’ daily chart technical situation, the August 7 NFTRH+ update is still applicable.
Commodities
We had some discussion in the global segment by way of the TSX-V and by way of the currently disinflationary/deflationary macro backdrop. Commodities continue not to be of interest yet.
Portfolio
Funds are balanced by gold (long-term risk management & monetary stability).
The new taxable account is primarily cash, collecting income as it waits patiently to deploy over time. It is aware of the need for income after the Fed rolls over and starts cutting rates, however. So short-term Treasury bonds are being added. Last week IEF (3-7yr) was sold and SHY (1-3yr) was increased. As was the direct 2025 note.
Positions in order of size.
Roth IRA (non-taxable, no contributions)
Cash/equiv are about 84% as I’ve started to take on a bit more risk with the market correction. As a man who stares at charts, I can’t help staring at the IRA’s chart and thinking that I don’t want to let the trend line break. I am a conservative sort, after all. That said, I do think a phase is coming where I will want to go hard on the gold miners.
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.
NFTRH is not to be distributed to third parties without prior written consent
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.
