Summary
US Stock Market: SPX double top morphs to a bullish looking pattern, as if by magic. Or as if by hopes for an increasingly dovish Fed and market liquidity.
Market Sentiment: A full 50% of CME traders expect a 50 basis point rate cut this week. That is emblematic of the optimism and over-bullishness during this bull phase obsessed with a softening Fed. This optimism remains a vulnerability.
Global Stocks: Bullish, near universally trending down in relation to major US stock indexes.
Precious Metals: Gold’s price is being revalued within the macro as confidence slowly fades beneath the surface of things. Silver is a wild card and a speculation within the bullish PM complex. It will probably lead the upside theatrics if the broad market starts to include the inflation trades and USD breaks down further. But on the bigger picture, the counter-cyclical gold mining sector will and may already be leveraging gold’s revaluation. Throw in an outstanding HUI monthly chart and despite what we may think we know about short-term hazards, the big picture we’ve been managing for years now, remains not only intact, but is getting more overtly bullish. Still subject to the broad market’s fate, however.
Commodities: Considered a bounce play at best, at this time. I’ve taken up several positions on that prospect. But the complex will be subject to the broad market, much like the precious metals.
Currencies: It looks like it’s mainly about USD once again. The world’s reserve currency. The Buck is perched above important support at 100.70, as if trying to determine whether the Fed will go .25 (which could instigate a USD bounce) or .5 (which could pressure USD, perhaps to a breakdown).
Indicators: Too many to list, but for some time now we have noted the sleepy situation in High Yield bond spreads, which has woken up a bit of late. When it wakes up for real it will be a real time signaler of a ‘risk off’ and increasingly bearish macro situation. For now, it’s just a little hint.
We also noted the un-inverted and now steepening 10yr-2yr yield curve situation. A flattener to inversion tends to run with an economic boom and a de-inversion to steepening tends to run with a bust (i.e. counter-cycle). VIX is postured toward complacency, which is a risk indicator.
In a beneficial indication for inflation trades, the Gold/Silver ratio pulled back sharply last week. A continuation of that move could see the bounce in commodities and related equities continue, along with the precious metals. A halt and reversal of that move would likely see the opposite. Here is how the ratio ended the week, along with gold’s progress in relation to cyclical markets (themselves a collective indicator of a macro slowly grinding counter-cyclical):
50/50
Those are the odds at the close of the week. The odds that the Fed will cut rates by not only 25 basis points, but take a double cut of 50.
What does this mean to me? It means that hefty rate cut sentiment is baked into the market and that the Fed is sitting in a cat bird’s seat, with the wiggle room to decide whether it wants to tamp down over-eager rate cut hopes (and the frothy speculation that goes with it) or affirm those hopes and perhaps launch another drive upward in equities. Another component in play is that if it’s a “disappointing” .25 cut, the market could sell down. If it’s a .50 cut hitting the most optimistic projection, the market could also sell that news, assuming the market activity leading up to the meeting continues to spike upward.
A Plan
One thing I am pretty sure of is that considering the CME Group’s 50/50 optimism about a .50 cut, if price activity in gold stocks as well as other areas continues to aggressively spike upward into the meeting, I will do some selling, some hedging or both. If things cool down and/or correct leading in to the great and powerful eggheads, I will probably be more moderate and patient.
As a gold stock trader/investor, I have watched long positions grow profits simply by letting the macro unfold. But they have grown right along with the still-bulling stock market, which I believe will be terminal. “But the miners’ fundamentals are improving; you yourself said so Gary!”…
The miners got destroyed in Q4, 2008, going from poor fundamentals, over-valuation (and a bubble top) to raging good fundamentals and crazy low valuation (I recall many cases where gold in the ground was being given away free after cash and debt were factored), and people were too shell shocked or scared to buy them. Gold stocks got killed in 2020, in a more compact version of 2008. It was hard to buy them then, as well. But buying on both occasions ultimately worked out quite well.
The point is that the next big buy will probably be on some kind of future wipe out. I am not saying that this week’s Fed meeting will trigger such a wipe out, but it does have the potential – depending on which way meeting goes – to create a market upset. And with the miners a positively correlated leader of the current broad rally, it is doubtful they would be able to resist a bearish phase if it comes. Just look at history.
Gold Stock Rally Leg Within a Bull Market
But enough of this negativity about what could happen. We are on a very nice rally after HUI closed August in channel breakout mode and remains that way in mid-September. What is happening is that the gold stock sector is seeing a fundamental shift in its favor and it is a leader in the broad rally. Let’s not festishize or obsess on concern about the positive correlation with the broad market bull. Let’s just hold it as a significant concern among several bullish elements.
My favorite chart argues that such worry could simply be the noise that any gold miner bull market worth its salt will feature. That is why we use the slow monthly chart to review the structure of the bull. There is little noise here. There is simply a 5th leg of a bull market that began in 2016. The next objective is 375 (with 330 now in the books as of Friday) and the ultimate target is 500 (which does not mean it has to stop there).
RSI and MACD are beautiful and while I do things in a controlled and conservative manner, part of me wants to bulk up the way some of the big names do, like Stanley Druckenmiller, for example. They tend to identify a big opportunity and take it for all it’s worth. That is what this chart of HUI tells me to do. The chart tells me that it is going to 375 and then likely, to 500, pending volatility along the way.
One possibility is for some typical FOMC volatility/bearishness, which this chart says would be a buying opportunity, possibly in the 300 to 310 zone (which could fill the 35.89 gap on GDX per Sept. 12 NFTRH+ update), which keeps the channel break alive. Another possibility is that things remain bullish and Huey simply does not stop to let people on board. But aside from those options (AKA noise), this chart says “bull market” and it says 375+ at least, and possibly 500 down the road, or nearer-term if things get hysterical.
This has played out in personally doing only minor profit-taking and kept me patient with preferred stocks like AEM, NGD, AGI, NEM, WPM, RGLD and OGN.V. Others too.
So next week is going to get noisy. Prices of not only gold stocks, but broad equities could bull hard or get smacked down, depending on what comes out of the Fed’s orifice on Wednesday afternoon. The machines will do what they will do, pre and post-FOMC. But a picture like the above does not factor short-term noise and it says “500” potential and looks good to go for the next objective, a higher high tick above 375.
As a side note to the improving macro and sector fundamentals we’ve been tracking, the 10-2yr Yield Curve’s baby steepener, noted last week, is still intact. This is a signal of the developing counter-cyclical macro.
I think many people still do not believe in gold stocks, because they think they always under-perform gold (others have for years called gold stocks a “value” because they have declined so much vs. gold, which is an improper valuation measure when not factoring gold’s “real” price vs. cyclical assets). So why not just own the product? Well, I do. But the product has been held for decades now and I view it as insurance and stable value. The miners are of course, the speculation associated with the value instrument (gold) that gets revalued during troubled times in the cyclical macro. That revaluation process is in progress now.
So why shouldn’t HUI be bullish? As I’ve parroted for a couple decades now, gold mining is a counter-cyclical industry. The theme goes further. In a counter-cyclical macro, as gold continues to assert in relation to positively correlated assets, we can expect the HUI/Gold ratio (HGR) to eventually grind out a new uptrend as gold stocks leverage gold’s developing bullish standing within the macro.
The 20 year downward dirge in the HGR has trained a majority to hate gold stocks, but in their frustration with the lack of performance DESPITE the inflation produced over the last 2+ decades, you can see why most people have come to the conclusion that gold stocks suck. But the ratio was only doing what it was supposed to do as the miners negatively leveraged gold’s under-performing status within the macro. This is the very picture of monetary and fiscal policy working (until periodic liquidations like 2008 and 2020) more often than not to enrich asset owners through inflationary macro manipulation, cycle after cycle.
We often note that the last righteous phase for gold mining fundamentals was 2000 to 2004. Well folks, the macro is setting up in very similar fashion currently.
The bottom line of these big pictures is that the nominal technical picture for HUI is fantastic to my eye, and it is nowhere near the expected (over time) upside. Meanwhile, the macro-fundamentals are creeping toward a situation that could introduce a macro situation similar to the 2000-2004 phase. Scores of robotic thinkers may be left behind because they do not look inside of markets to find the real drivers. They follow easy to understand dogma read in large media and small. They KNOW that gold stocks suck because they always under-perform gold.
We have an opportunity in the coming months and later, years to be the first to face down that dogma and capitalize on what is actually happening, because our assumptions – based on facts, not dogma – are sound. Indeed, we have been facing down that dogma since the macro began to turn (by various measures), roughly at the dawn of 2024.
More Gold Sector Internals
Not surprisingly, HUI got back into gear with an important internal, gold relative to an inflation expectations gauge. From an NFTRH+ update on Thursday:
Before getting to the weekly and monthly charts, let’s note that Huey is still traveling with his preferred macro-fundamental condition, fading inflation. The Gold/RINF ratio is again positively diverging and HUI is taking note.
By Friday afternoon Huey had finished the job of closing the divergence, and so this picture of a righteous fundamental indicator (stating that gold miners most certainly do not benefit from inflation) continues apace.
We have talked about gold’s still “in process” work vs. the headline stock indexes. But let’s also remain aware that gold has been trending up vs. broader measures of the US stock market for nearly 3 years now. These broader measures do not include the sex stars like NVDA, META, AAPL, MSFT, etc. that have painted the major indexes extremely bullish. Here is gold vs. small caps (IWM).
Gold vs. the median of 1700 stocks is in a very similar state. It’s a stealth bull market in Gold/Stock market indicators, even as Gold/SPX continues to try to grind out a positive trend.
Looking at gold vs. some of the more defensive sectors, we see a 2 year uptrend vs. Healthcare, which has itself been bouncing vs. SPX lately.
Finally, Gold/Utilities pits the metal against a classic defensive sector, which becomes valued for its dividends during counter-cyclical phases when interest rates are declining. In other words, the Utes see their bond market “income” competition weaken. Gold has risen for 2 years vs. the Utes as well, but it appears that as more people get the declining interest rates memo, XLU is exerting a little dominance over gold (and hence, what looks like a topping pattern in the ratio). I don’t see this as overly negative to the case for gold.
The above are just some perspective on internal views into the markets that most are probably not considering. I don’t know why they don’t consider internals like those above (and others), because in my book and in my analysis, they mean only everything where keeping a clear and open mind is concerned. Think again of all too many herds thundering along to the “inflation is good for gold stocks” touts that were so tragically wrong for all those years.
This public article on Friday had much more to say generally, on the matter of gold stocks and the proper macro for the sector.
US Stock Market
Here is what I perceive as the Achilles Heel to the intermediate-term gold stock case. The great cyclical beneficiary of Fed inflationary policy over the years has not been gold. It has certainly not been gold mining. It has not even been commodities to any great degree. It has been the bloated hog known as the S&P 500 and its cohorts.
I think this and other US index charts are riding the ‘Fed rate cut’ hope trade right now and are just as vulnerable as gold stocks to the question of “.50 or .25” per the opening segment. But there it is, a bullish looking pattern having formed after a would-be double top filled the upside gap and failed to play out to the downside. Why again do I hate shorting in a bull market? A bull market that is now 16 years on?
The theme for stocks is high risk, sentiment-wise. Gold is in that same boat. We just have to deal with it because it is a feature of bull markets and strong bull phases. As you can see, Dumb money is starting to grab stocks again while Smart money fades.
Sentiment is generally as it has been. Over-bullish with periodic micro-twitches as I call them. Sharp sentiment pullbacks on market corrective activity, thus far clearing the way for more bull.
Stock Market Strategy
This remains the unchanged. If/as our “to or through the election” view remains on track I will continue to speculate. But here I need to remember to take some profits. I finally did that, selling GNSS on Friday. But there are newer positions in NVDA, SMH, ASML, and even newer ones like SBSW and COPX starting to sport profits as well. I am quite interested in the tenor of the market heading into FOMC on Wednesday. Again, if I feel like things have gotten really frothy into the Fed, I cannot see how I will not be taking profits, or at least hedging where the gold stocks are concerned. But I’ll let the market play out, meanwhile.
Global Markets
Personally, as an American, until I see the trends in global market change relative to the US headliner, SPX, I will just play in my own back yard. That is because none of it is considered an investment at this time and the implication is that the better odds are in American stocks, especially since I see and am tuned in to this market much better than many global markets.
Most global markets are bullish, but let’s show the downtrending world relative to the US using daily charts.
Europe/US: Downtrend intact.
UK/US: downtrend intact.
Japan/US: Downtrend intact.
And so on and so forth, India (attempting a trend change from down to up, with a lot of work to do) is the exception with China/Asia/EM/LatAm, etc. trending down vs. the Good Ship Lollipop.
We’ll leave the segment with an update of the situation for the Canadian TSX-V, which continued to spike last week in denial of our 503 pattern target. A takeout of the orange arrow would start to lean this bad boy bullish. A failure here would keep the target in play.
Commodities
And a bullish TSX-V would of course imply a nice underpinning for the commodity complex, which has been beaten down like a rented mule. “Commodity Super Cycle” promoters could finally get a chance to ramp up the promos once again but in essence, if the sector rallies, it would really just be a lagging segment of the wider broad market bull. It would be nothing unique and in my opinion would have a shelf-life if we are right about a coming bear market in equities.
But for now, some items appeared playable, and so I re-took a couple of Energy positions (CVX & XOM, with an eye on AR), Copper (COPX), PGM (SBSW), Rare Earths (MP & LYSDY) and discounted u3o8 holder SRUUF. We shall see, but so far, so good.
But let’s be aware that Commodities (GNX) are trending down and bounce or no bounce, would have to break above 605 (current price: 519) to break the downtrend. Worse, the sector is robo-trending down in relation to gold. So the bottom line for me is that commodity positions are certainly just a trade at this time.
Currencies
With JPYUSD ticking a new high for the cycle and USD weakening I am prepared to call any “Yen carry trade” instigated market problems over for now. Markets bulled last week and they bulled to a weakening US dollar, so I think good old Uncle Buck is back in his normal seat, ‘anti’ risk on, cyclical market (and the precious metals).
Here is JPYUSD (daily) bulling along, to no ill effect for stocks.
Here is the weak USD (daily) waiting to see if what we speculated about in the opening segment may be a possibility. That being hopes (and associated bullish market positioning) proving too high, should the Fed only cut the Funds Rate by .25 this week. The Buck appears to be pondering that question as well. Given the 50% CME projection for a double rate cut, Uncle Buck could get bid up if the Fed only goes for a single .25%.
Portfolio
Funds are balanced by gold (long-term risk management & monetary stability).
The taxable account was created over the summer and is not old enough yet to have a higher percentage of equities (even for my conservative self). I will not chase. I will have some exposure, enjoy the income of cash & equivalents and wait for future opportunity.
Roth IRA (non-taxable, no contributions)
Cash/equiv is around 82%. Gold miners and other stocks held are currently unhedged. I’ll enter an FOMC week that has a lot of emotional energy attending it with an attitude of taking and/or preserving gains. But also try to take advantage if things get volatile or temporarily bearish in the gold stock sector (i.e. a buying opportunity). Meanwhile, the chart held support last week and popped to a new high. This makes me wonder about the possibilities of a “channel buster” and terminal shot upward, or the potential of another overbought reaction zone.
As a reminder about my personal cash management, please don’t put expectations of a model portfolio on this situation. These are not model portfolios, they are real ones and they are run by a conservative sort who is content with cash and bond income, while speculating around that nut. In short, I am not pressured to “make coin”. Although I will plan to increase exposure on opportunity. I could toss a model portfolio in here, but what would it really mean if it’s got none of my skin in the game? It may look pretty, but it would just be theoretical.
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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