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Conversational NFTRH 826

[edit] I’m about half way through this report as it becomes apparent to me that this is one of those conversational reports, going stream-of-consciousness rather than regimented. There is a lot in motion in the markets now, and we are being given data points to work with each week. So let’s focus and refine the plan. This week, the opening summary is omitted, as I think the wordy report below should be digested, as is. We are not in a paint-by-numbers market situation.

Market Situation

The Payrolls report came in light and as usual, and heavily slanted toward Services and Government (lagging segments) and away from Manufacturing (an economic cycle leader). The US dollar reacted poorly, as it would with more data implying a slowdown and the softening of the Fed. But then USD (DXY) rebounded as financial markets tanked. And that, my friends, is the primary (only) fundamental USD has going for it. A liquidity bid.

If we tune out all the fundamental noise, we see a bearish-biased chart with the potential to bounce, and possibly bounce hard. What about a real market liquidity crisis? Well, I’ll still put my bet on Uncle Buck vs. the BRICS/De-dollarization stories that are probably in progress, but far from done. A global liquidity crisis would likely drive USD much higher.

But as yet, the stock market (SPX) has not broken down from its uptrend, but that double top does not look good at all. SPX looks heavy to fill the gap at 5371. As you know, I am not going to play day trader and try to short and cover shorts with this pig maintaining its uptrend. I’d rather collect my cash/equiv. income and wait for real opportunities (to be bullish the counter-cyclical gold mining sector and actively bearish the stock market), either sooner or later, when it starts breaking trends. First step to that would be losing the ‘C’ low (5119).

I would say it’s a good bet that the stock market may be setting bears up for a panty raid (conjures images of bulls taking the bears’ ball away, and then chasing them all around the court giving wedgies), except for that lower high that formed the double top. That was technically the first step of a potential trend breaker. Meanwhile, there is support aplenty before the index would be considered broken below ‘C’.

If stock markets do continue to tank we can expect USD to ramp upward to resistance at 101.70, per the chart above. We can also expect at least a test of the ‘C’ low and the rising 200 day moving average on SPX.

Meanwhile, the Fed is poised to start cutting, to start cheapening money, cheapening savings. That is, of course, a trick they have used for decades now in service to eternal asset market price appreciation and the enrichment of asset owners at the expense (rising prices vs. income) of the middle/lower classes. And these dunderhead politicians sit around arguing about schemes to lift the disenfranchised out of that hole. It’s not happening, because Keynesian economics, as applied by modern central banks, is rigged the other way.

Off soap box and back on topic. CME traders believe that a September rate cut is a done deal, while a full 30% are betting on a double cut. A Fed jawbone was out yesterday talking rate cuts.

As if the Fed has any decision to make. What it actually did was arrive to the inflation fighting party too late, and now they arrive at the embryonic stages of a new inflation manufacturing cycle. Whether late or right on time. If they are late they will have already kicked off the next economic bust cycle. If they are on time, well, Janet?

She is part of the administration. What else is she going to say? She may be right, but I don’t think so. Handily, a long awaited signal to the contrary flashed in the bond market last week. The 10-2 yield curve has un-inverted, into a fledgling steepener. Remember that a flattening of the curve tends to run with an economic boom (or at least firmness) and a steepening tends to run with an economic bust. It does not mean that the bust needs to be realized right this moment (of de-inversion), but it does cast much doubt upon the aptitude of the studiously pensive looking woman pictured above.

Looking out into November, right around the corner, we see a majority of CME players expecting not two, but three .25% cuts by then.

So the economy is slowing, the election is upcoming, the economic signals continue to erode, despite the heroic efforts of government (hiring hard) and the ongoing strength in services industries (an overwhelmingly massive percentage of total employment, and a laggard as an indicator), as inflation signals continue to fade.

Here I will interject that I was stunned one day when I saw Kamala Harris try to talk about inflation. She out-did Trump’s ignorance about it (recall him badgering Powell to “CUT!” while L/T yields were pressing the upside limiters)…

…as well. So whatever administration we get, it is likely to be ignorant about the inflationary process at best, or will actively promote it, at worst.

Today, we are in the new macro and on a game plan that sees a turn toward deflation from a Goldilocks phase, which itself was born of the inflationary phase before it. This new macro is represented by the break above the trends. I believe inflation signals and the economy are declining toward the pivot point to a new inflation phase.

Our current plan is that this event will drive yields down, perhaps to 3.2% on the 30yr as the Fed tries to save the day once again, and the government tries to spend its way out of it, once again. The current macro plan is simply this; they (Fed and government) may try to give the appearance of normalcy, but folks, it ain’t gonna be normal.

Well smart guy, what IS it gonna be then? We are in uncharted waters, literally. My guess is that an oncoming liquidity problem and bear market will be met by the same old fire hose monetary policy from the Fed, and debt-spending policy by the government will see them attempt to jack the $34T in public debt even higher. In other words, inflate fiscally. So my educated guess is that deflation fears will be met by inflationary policy (as usual), but due to the trend changes in long-term yields, said inflation will not work so well for our heroes.

My guess is that they will trigger a long Stagflationary phase of economic weakness as relatively precious cyclical assets like copper, oil, uranium, etc. are bought up on a global scale as nations at war economically, grab for resources. Stocks will generally do relatively poorly because they reflect companies doing business in a grinding and painful economy, the US dollar will have blown out to the upside after whatever high it makes in coming interim liquidity crises (again, guessing here folks; trying to convey what’s on one guy’s mind, both short and longer-term). The USD situation will depend upon whether we are entering a liquidity crisis sooner, or later. We are looking out over a 2-year horizon, at least.

Amid the downs and ups in an inflation-choked economy (again, the Continuum above got strangled in 2022, when its long-term downtrend ended) and markets, there will be real monetary value. Gold. Bitcoin, you say? I am more old fashioned than you. To me it’s just a cyclical speculation (although Suze Ormand strongly begs to differ), not a monetary alternative or holder of monetary value. On that future day when the world rejects all of this global debt paper after the ongoing mega-debt binge, who’s going to be left standing then, eh? The server farms with limitless bitcoin bytes in them or the heavy metal and ancient money from the earth?

But again, I am old fashioned.

Sentiment Snapshot

Last week in NFTRH 825:

The sentiment picture is contrary bearish as Dumb money indicators cross the upper bound once again and Smart ones start to fade. It’s not deadly extreme yet, but it sure is not healthy from a contrarian standpoint. Worse, the Risk Summary is quite unhealthy. We gold bugs should keep in mind that the heavy anchor of monetary value is in the same sentiment setup as the stock market.

Well, that unhealthy Risk reading played out in a bearish market last week. As for gold, it’s going to take more than the normal corrective activity in the sector and gold simply resting on its daily EMA 20 for the risk reading to ease appreciably. As noted previously, risk does not need to be realized when first identified and indeed, risk travels right along with bullish markets.

On a long-term basis, risk from sentiment, price and macro-economic perspectives is much higher for stocks than gold. Back on stocks, the high risk reading last week had us cautious and that caution was warranted. Today, the short-term risk situation has backed off to the degree that a bounce could be viable in the coming days/weeks.

NAAIM were moderately over-bullish at 70% before a tough end of the week. They are surely more bearish now.

Investors Intelligence were fairly depressed at a Bull/Bear ratio of 2.41 on September 3. This is a sentiment tailwind to a bounce theme. But newsletter writers do not want to be in the habit of being wrong, i.e. being contrary indicators at important decision points. So that is why they are more stubborn, IMO. They want to look right with the markets as often as possible.

AAII were still moderately over-bullish on September 5.

Bottom line on sentiment is that it was ripe for a pullback. The market pulled back. Long-term it is an embedded form of unhealthy (unquestioningly over-bullish by a majority). Short-term, we’ll get these sentiment events along the still uptrending way, until said uptrend ends. Whether we will find out in hindsight that it is ending now, or it ends later.

Precious Metals

Gold is going to be left standing. Friday’s public article illustrated gold’s handsomely improving relative status to cyclical markets. Here is the view at week’s end. That is a sweet hold of relative status to stocks in the bottom two panels. Not to mention Gold/Copper (counter-cyclical metal out-pacing the cyclical one) and Gold/Oil, which is indicative of a macro swinging in favor of gold mining, as an industry. Talking miners here, not exploration lottery tickets. Miners, which can leverage moderating/declining costs relative to their product.

The fly in the bullish ointment at the moment is the Gold/Silver ratio’s (GSR) strength as the USD decides whether or not to get its bounce back on. The GSR is like a backbone to a rising US dollar, because its implication when rising is risk going off in the markets (including gold stocks, which have been positively correlated with those markets) amid market liquidity problems. Again, frightened money on the move benefits the reserve currency until proven otherwise, and it usually benefits gold over silver.

But the picture is increasingly fundamentally bullish for gold mining. Here we need to keep in mind that the most intensely positive gold mining fundamental situation came in Q4, 2008, while gold stocks were crashing. However, and importantly, that phase, that clean-out of the sector, came after years of excess during the inflationary phase of 2004-2008, as gold mining fundamentals degraded over time.

That is not what is in play today, and so I don’t expect a crash any time soon. Not unless the PM complex climbs too high, too soon, and in unison with the broader cyclical markets, the latter of which has been the case to this point. If, for the sake of argument, the stock market continues to be bearish and gold’s ratios above continue to firm up their bullish trends (and Gold/SPX actually establishes one), a buying opportunity will be presented.

Again, this macro situation is nothing like the one that preceded the 2008 crash, or the 2020 crash for that matter. It is much more like the 2001-2003, when the GSR rose, and so did HUI. Not coincidentally, gold ratios like those above were also strong prior to blowing out in 2003-2004 as the grand new inflation phase took hold. So the buying opportunities are likely to be less dramatic.

The green shaded zone on this long-term chart may not look like much, but its implication dragged on for 3 years before inflationary policymakers killed the case for the gold mining industry through Inflation onDemand, every damn time asset owners needed to be bailed out (at the expense of the middle/lower classes). In my view, the green shaded years were righteous, and what has gone on since has been a blight born of central bank and government policies.

But I have digressed again. We as gold stock speculators can prepare for more bullish action to come, without necessarily fearing the Gold/Silver ratio. I’d respect it all along, but I don’t fear it when logically extrapolating 2000-2003 forward. It’s a quant of history. Nothing more, nothing less. It does not have to play out as it did in ’03, but then again, a majority are not watching internal signals like this. They are listening to media, chart jockeys, Suze Ormand and worse, the likes of Biden Admin mouthpiece and Economic Information Minister, Janet Yellen.

So if we are not in fear of a rising Gold/Silver ratio (beyond its already occurring moderate effects) and we marry that to the other panels in the first chart of the segment, how can we not have a bullish view? The GSR does not necessarily NEED to hurt the miners and the gold mining rally, per monthly HUI above, technically appears to be the next and possibly best leg of the painful bull market that began in 2016. Next targets continue to be HUI 375 (resistance) and depending upon how bullish things may get, 500. The handle breakout implies new highs for the bull cycle, which implies 375+ (actually, 373+, but 375 has been our operating figure since the 2018-2019 lows).

Therefore, I don’t expect anything extreme on the downside any time soon. However, I have been wrong before and will be again, so in the event that the stock market really comes under bear pressure and the miners succumb to it, we should at least be aware of those gaps, beginning with the February gap at 25.94 (on daily GDX, below).

However, when considering the bullish fundamentals noted above, the fact that the sector is far from stretched on the bigger picture, also as noted above, and given the intact daily chart uptrend, why not consider that a gap fill at 35.89 and/or a test of the ‘C’ low, may be all that is in store from the bear side.

I don’t want to sell Hopium here. But I don’t want to sell perma-caution either. I want to describe what I see and why I see it. I leave the rest up to you, including contacting me if you see any fatal flaws in my thinking.

I resisted adding positions because I had a busy day on Friday outside my office and more so, because it’s the gold sector and it seems like during a corrective pullback, there is always a lower tick to go before the bottom. If I see an oversold ETF on a gap fill and a test of support at a higher low to ‘C’, that could be the signal. Otherwise, I’ll stay patient and miserly for a bit longer.

Commodities

It’s as we’ve been saying, against a disinflationary backdrop commodities are not favored. A liquidity crisis and deflation scare? Uh, no.

While commodities will rally and fail, at best, in my opinion, the broad complex will have to wait for the next inflationary phase to kick in. And even then, if that phase is economically corrosive Stagflation, the performance among individual commodities could be lumpy, inconsistent, rotational. Commodities have much more economically cyclical character than gold. But we’ve belabored this repeatedly over the years.

So, in my book commodities… not yet.

Meanwhile, since commodities and global markets have not really made it into this conversational report, let’s look at the Canadian TSX-V, a speculative guide for commodity/resources markets and certain global areas. It is back to support, and any tick below the previous low will load out target of 503. Actually, given the intact trend off the top, it’s already loaded.

Portfolio

Funds are balanced by gold (long-term risk management & monetary stability).

The taxable account is like the Waiting Place, for people just waiting… (for the top to come, for market to break down, for the market to hold its uptrend, for long setups, for short setups)… just waiting.

I am having thoughts of trying to get cute, take the tax loss on AE.V, and then buy back amid peak tax loss season. Of course, that could be a way to trick myself out of a future winning lottery ticket as well. So I’ll have to think about it. It’s not going to kill me to hang on.

I am also riding the GDX profit on down from something solid to something currently so-so, on paper. Too late now and with the ETF and sector intact at this point, I’ll stay patient. All that cash helps in the patience area.

Roth IRA (non-taxable, no contributions)

Cash/equiv is 84%, so I feel well risk-managed and have about zero desire to start shorting the market until non-daytrader type setups appear in a coming bear market. You may well go about it differently, and this is where I gotta be me and you gotta be you.

I not only did not sell any gold stock positions on the difficulties last week, I added WDOFF (WDO.TO), to alleviate FOMO from the equation. With the sector technically intact, I want to add positions, but I tell you this… NFTRH will not sponsor gold or gold stocks and if the correction were to unexpectedly morph into something worse, I’d probably do some more selling.

But again, I expect a resumed rally and am well risk-managed at this time. As usual, I will respect my chart as well, and it is intact. Last week it was noted that this picture was getting overbought. Now it’s in pullback mode and you can see the support level I am watching.

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.