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Summary

US Stock Market: [Last week] 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. This week: I’ll take “B” Alex, dovish Fed… market ticks a new high on Fed double rate cut.

Market Sentiment: Our caution that CME might have been too optimistic about a double rate cut was wrong. Indeed, 40% of CME traders were not optimistic enough. The elements are in place for a dangerous sentiment-driven blow-off to generate in markets. Sentiment is over-bullish now, but could get much more so.

Global Stocks: Bullish, near universally trending down in relation to major US stock indexes.

Precious Metals: Gold is riding a similar risk wave as stocks. That’s not its best suit and it is not the suit that paints gold mining as unique. However, the macro is changing in favor of gold and the miners that would leverage that. If the party builds to speculative excess, gold 3000+ sooner rather than later is not out of the question. Silver’s next target is 35. After that we’ll manage potential speculative heights, if applicable. The long-term HUI chart is beautiful. I love it. What’s more, the macro continues to grind into place, fundamentally. However, the miners will probably get croaked for their positive correlation to everything else, currently. Later, the bull market would continue.

Commodities: [last week] 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. This week: Took a few profits (e.g. SBSW, COPX), added few items (e.g. URNM, SRUUF).

Currencies: Fed starts to withdraw supportive policy and USD resides on the cusp of failure (at support surrounding 100.70) If it holds and turns up, it could correct the heck out of everybody. If it fails, it’s a long way down to 93-94 and a hell of an asset market party could ensue.

Indicators: The report again discusses some important macro indicators. These are the guides that keep us on the right footing amid the noise and confusion. Primary at this time are the steepening 10-2yr yield curve and the now declining Fed Funds rate. See segments below, and consider that the media are advising the public that in essence recession risk has been avoided. This could instigate an amazing speculative bull atmosphere into the election even as the yield curve’s “bust” signal lay out in the future.

50 Bp

The Fed held off, held off, held off some more. It held rates at a high level for meeting after meeting, despite the fade in inflation signals that we’ve expected (and now seen) since Q1, 2023 (Goldilocks), unemployment that has long-since based and turned up, and despite the fact that it has been government itself, along with embedded and lagging services industries that have kept the employment numbers afloat. This is leaving aside the fact that BLS has revised these headline numbers down.

This begs the question, why even pay attention to Payrolls as initially reported?

It begs another question. Why cut now, and why cut by an attention grabbing 50 Bp? Why did a president barely in possession of his faculties weigh in and protesteth too much, only to be caught in a lie (or a mental lapse) about having sat with the Fed Chief? Why? Maybe because, this…

New highs for the S&P 500 at a strategic pre-election juncture that supports our long-held bull view of “to or through the election”.

Putting the tin foil hat aside, let’s be clear on a couple things. I have consciously kept my tin foil hat in the closet since initially falling down the Rabbit Hole in the 2002-2004 time frame. Back then came a greenhouse, organic/heirloom gardening (well, an attempt, anyway), 20 year food supplies, a generator, wood stoves and gold, guns and ammo. A lunatic? Sure. I went that way for a period in time. But for 20 years now I have been working at being even keeled, tuning down the paranoia and simply viewing modern life as it is and hence, modern markets as they are (not how my tin foil hat advised that they are, or how I wanted them to be).

The other point I want to make clear is that I am no Trump supporter. It probably should be re-stated because I’ve been making plenty of loaded statements (based on the facts of the employment data, the fiscal stimulus operations, etc.) about the Biden administration and the democrats’ apparent initiatives to keep the White House. But those who knew me in 2016-2020 time frame know all too well that I probably went overboard making fun of, criticizing and debunking the lies of the orange man.

My job is to tell what I see; my interpretation of the truth. It is not to support either decrepit political party or add to the disinformation that is now the norm, thanks to social media and the divisions getting ever more pronounced in society. So let’s leave it at this; for whatever reason, the Fed chose to hold off until this point of the final lap toward the election and you can see above the immediate reaction. What’ more, the SPX chart has now been shoved upward from a triple top structure to a breakout structure.

Could fail tomorrow. Could gain energy and power “to or through the election”. Funny how this story comes together in line with our ongoing thesis, eh? Or maybe it’s not so funny.

Stock Market

Despite the summer rollover of the leadership chain (SOX > NDX > SPX), I have added (ref. Portfolio segment) Semi and big Tech to the existing defensive positions in Utilities and Healthcare (not to mention short-term Treasury bonds). That is because I believe that “they” are trying to stimulate a resurgence of the speculative atmosphere. Whether it is “they” or whether it would just happen due to human emotions (FOMO and its associate, MOMO), the odds are that IF the market is regenerating the bull, it could be led by the previous leaders into the top.

At this point, it is Tech that is making those hints while Semi remains under wraps.

Here is the leadership chain, illustrating the situation. For my Tech and Semi positions to pay off handsomely, the bearish trends in these ratios will need to break to the upside. As you can see, SOX/SPX and NDX/SPX are at least making hints that could happen.

The view of the broad bull remains just that, bullish. But that does not mean I am a relaxed and confident participant. That is because as has been the case all year (with a couple interruptions to reduce risk), the market is at high sentiment risk, not to mention fundamental risk as the economy slows. But even there, a caveat (isn’t there always a caveat?) could be what is going on in manufacturing, which is a bump up if the Empire Survey is a good guide (to the coming ISM release for September).

Bottom Line

The predominant theme has been for a “last chance power drive” style bull market leg running “to or through the election”, and that has not changed. If it does change in my view, you will be the first to know.

US Market Sentiment

Someday it is going to matter that risk is high (including for gold). But as of Friday, we have not yet seen that day. It can be difficult to maintain a stance (in this case, bullish) in the face of contrary sentiment indications. But that is the market we have now and extreme bullish sentiment is a feature of bull markets. It’s a paradox of sorts and it needs to be respected, but not overreacted to.

As of September 18 NAAIM (investment managers) were increasing their bullishness. It is very likely they finished the week (9/20) in a briskly bullish stance.

AAII (individuals): Sentiment bumped up as of September 19 to 51% bullish. The reading is over-bullish, but not extreme.

Investors Intelligence (newsletters): In sharp sentiment pullback mode (Sept. 17) at a Bull/Bear ratio of 2.15, declining from a second spike to near 4.4. II were obviously in FOMC week stress/worry mode. Their sharp sentiment pullback to a middle ground was not surprisingly rewarded with a big rally in stocks.

Market sentiment as a whole is over-bullish, but certainly not to the degree that would necessarily signal extreme sentiment risk. In other words, if markets are to keep on bulling, sentiment is not yet a clear and present danger.

Yield Curve

We had a public post on the yield curve, its big picture implications and the bum deal the media are advising to the average American, on Friday: “The relationship between the 10- and 2-year Treasury yield briefly normalized Wednesday, reversing a classic recession indicator.”

Disgusting, when considering that lazy news reporting is giving the exact opposite advise from what it should be. History has shown that the now steepening curve starts the clock ticking on an economic bust, while the media imply that recession has been avoided and fears of recession were unfounded.

Here is the short-term picture of the 10-2yr curve, breaking the inversion and steepening. T-minus…

Precious Metals

We have long noted the out-performance of gold (counter-cyclical) to copper (cyclical). But what about the miners? In my opinion, the macro case for gold stocks is still being missed by a vast majority, which believes that gold will always out-perform gold mining stocks. Our view is that there will come a time when that majority will be taken by surprise by a persistently rising HUI/Gold ratio, which we have noted has been on a minor uptrend since March in an ongoing attempt to change the major trend to up.

Meanwhile, the GDX (gold miners)/COPX (copper miners) ratio is doing something similar. It has not yet clearly broken out of its base, but this is expected in the coming months. During last week’s Fed-instigated market relief fest, the ratio pulled back and is testing its uptrending daily SMA 50 and the support of a couple previous highs.

The HUI/Gold ratio over the same period had been in a clear downtrend, leading to the February low. You may recall that at the time, we speculated that may have been a washout low. So far, so good on that idea. For the sake of a bit of caution, I have inserted a ‘lower high’ red arrow, although for the sake of confidence, let’s also note that a candlestick chart would show that a higher high was actually made at that point before getting reversed in-day (line charts to not show in-day activity).

Regardless, the ratio chart would like to see the higher lows and preferably, the daily SMA 50 or the support just below it hold up in order to remain constructive.

Here is the big picture view showing the potential for an upturn in a counter-cyclical macro.

Here is a daily chart view of the HUI/SPX ratio, we see the miners holding serve against the headline stock market index in an attempted bottom and upturn for the ratio.

Despite the obviously bullish indications, and aside from our main bigger picture caution on the precious metals complex (generally positive correlation with cyclical and speculative markets), let’s note another potential, but less likely vulnerability. That would be that if the stock market really starts to MOMO at the instigation of a speculative upside blow off, the risk-off/defensive qualities of gold could get marked down, driving the miners down in relation to broad stocks. I am not trying to be overly negative about a bullish sector, but I am trying to have us be aware of possibilities ahead of time. So we should watch charts like the above going forward, to see if they maintain the bullish internal situation. Thus far, they have.

Meanwhile, how can you call this (gold weekly) anything but bullish? The darn thing may be loading our 3000+ target sooner rather than later. But if/when it gets to whatever interim high is out ahead, the technicals of it suggest that the gold price would take a pretty good hit. If this were the stock market, gold bugs and bears would be crying “PARABOLIC!”, and not in a good way.

Gold has exceeded the smaller pattern’s target of 2450 and is seeking the target of the giant Cup, at 3000+. There is MOMO. There is FOMO. There is a bullish market.

The log scale monthly does not look so overdone, does it? That is because it is percentage based, rather than linear. But it does advise that whatever high is made in the high 2000s or even 3000+ could be a caution point prior to a well deserved pullback.

Silver, meanwhile, held the initial support area and has reloaded the target of 35. Let’s keep silver simple for now and manage that target, rather than speculating about 50, or 100 or whatever sweet dreams the average silver bug may have. One step at a time with this wild child.

HUI monthly (log scale) continues to target 500 on the bigger picture trend, after breaking the corrective consolidation channel from mid-2020.

The above can act as a companion to the linear monthly chart we used in Thursday’s NFTRH+ update, showing the beautiful structure of HUI busting upward while one important macro indicator busts downward. The point being that macro fundamentals continue to come in line for the gold stock sector, and…

…that is relevant to the HUI/SPX ratio chart above, which is holding its bottom and potential trend change stance.

Precious Metals Bottom Line

The macro is grinding counter-cyclical, and the Fed just admitted as much by its actions last week. My bones of contention with the Fed were its timing and rate cut depth, not the signal that the economy is slipping counter-cyclical.

What is the proper backdrop for the precious metals and especially the gold mining industry? Counter-cyclical, per NFTRH, Bob Hoye and few others. What’s more, I have noticed Bob (from whom I long ago learned concept of Gold/Silver ratio as a “metallic credit spread” and the counter-cyclical macro beneficial to gold mining) has had several false starts over the years on his “post-bubble” macro. But we have managed to go by what we see and stay respectful of the bubble that is intact to this day, but is in my opinion, under threat. Especially, post-election, whether late in 2024 or in 2025.

Meanwhile, the precious metals complex is steaming higher as part of the “everything bubble”, currently. That paints it as vulnerable when broad markets top for real. That would be despite the solid fundamentals and a result of MOMOs and FOMOs currently climbing aboard due to emotion as opposed to fundamentals.

Meanwhile, let’s enjoy the ride for as long as it lasts. When internal indicators flash warnings and trends come under threat, we’ll take action. But as of now, it appears that it’s still “bull on”. My strategy will be continue to be adding to current (favored) positions and maybe look for another exploration spec or two, depending on the junior/exploration sector as a whole.

To that end, we’ll continue to keep an eye on the TSX-V index, which happens to have made a higher high to the previous high. As of now, that neutralizes the multi-shouldered bearish pattern and leaves our downside target of 503 unregistered and the associated gaps unfilled. So this remains the global index most important to our view of smaller, more speculative precious metals and resources stocks as well as commodities.

It is conceivable that ‘da V’ could rally, signaling a speculative frenzy including the resources and commodities segments. A final “hurrah!” of sorts before one day filling those downside gaps when a recession becomes a clear and present danger amid deflationary pressure.

Commodities

Very generally, I’ve taken positions (but already taken profits in PGMs and Copper) on the prospect that the commodity/resources complex could play some catch-up in a speculative atmosphere. Get the “commodity super-cycle” dorks back on the tout for a while. But I continue not to be a fundamental commodity bull in this macro.

• GNX, CRB, DBC are only bouncing. They can be taken more seriously if TSX-V above continues upward and the index/ETF bounces continue.
• Not surprisingly, WTI crude oil is only bouncing within its downtrend. It is weighing down the indexes. Gas (continuous contract) exploded higher by 16% on Friday and other measures rose by around 6%, while my Gas play, AR barely budged. Gas is smack dab in the midst of its positive seasonal (on average). The Energy sector (XLE) is still trending down, but I hold a couple (CVS & XOM) for a potential break of that trend.
• Profits were taken on the copper miners ETF, COPX. It has halted at a lower high to the previous high, but if it does something like the TSX-V above has done, the bull would extend and I’d consider taking back some positioning.
• Uranium has been beaten up but the u3o8 holder and the ETF, URNM were added last week on the prospect that the beating had gone on long enough. So far, so good.
• I took a quick and significant profit on PGM play SBSW, but keep it on watch as Palladium and Platinum continue to be viable, if the greater complex puts on a move. Pd hit its highest level since December, 2023 and Pt continues to work on an arduous and grinding potential trend change.
• MP and LYSDY were added in the REE patch, although the former remains in a downtrend and the latter is only working on a trend change.
• The Ags continue to trend down and being the segment I understand least, I’ll just let it sit for now.

Currencies

USD is back in it’s “anti-market” suit and despite the obvious rug pull (of supportive policy) by the Fed, it continues to grapple with last ditch support at 100.70.

Portfolio

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

The taxable account took a few profits, added a few things and continues to patiently lightly play the game, as it only came on line in August and I don’t want to force anything. However, with the Fed beginning its cash cheapening regime, I did convert more cash to short-term Treasury bonds via SHY and the direct Treasury note.

Roth IRA (non-taxable, no contributions)

The chart continues to be intact and bullish, and so I will continue to be intact to the current mode of operation.

Cash/equiv is 82% and that is fine at this time. However, a few more signals that the market could be entering a blow off phase, and I’d get more involved while understanding that a blow off is exhilarating while it’s playing out and devastating after it plays out. But before I go bubble-head like that I want to to be boring, conservative Gary for a while longer, awaiting better evidence. It’s been a good year and that keeps me from feeling any sort of desperation, AKA FOMO.

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.