Once again, we go conversational and less regimented. Let’s get right to it…
“Through the Election”
We are finally here. But with a twist. As new information has come in (Trump and his economic implications, along with the market’s reaction to the election) alterations or more accurately, more detail to our plan may be appropriate. Let’s try to delineate the main options.
Option A
Per our original script, the democrat administration, which we have chronicled all year long to be goosing economic signals through vigorous and unprecedented government hiring and debt-spending, may simply withdraw much of that beneficial (actually, long-term destructive) fiscal policy during the lame duck period through the end of 2024. They will be out on the street in a couple months, so why not take your ball and go home? Why not put the screws to the incoming Trump?
That represents a clear and present danger to the markets, which knee-jerked upward after the election of the “businessman” who will supposedly fix the economy. We are through the election, after all. The show could end tomorrow. The VIX got destroyed, but guess what? Its negative divergence to the stock market can still be described as intact:
Option B
Or… per an NFTRH+ update on November 7, market forces could take over with the supposed destruction of the VIX.
If we choose to deemphasize the VIX divergence (I do not choose that, personally), we can check bearishness at the door and live happily, not ever-after, but for a stretch of time. The VIX has, during the post-2020 bubble phase and during massive stretches of the post-2008 bubble phase, wallowed on the floor interminably as the stock market – or at least its headline indexes – bulled.
More from Sentimentrader.com (subscription recommended if you are all about in-depth sentiment and historical analogs/analyses)…
The situation has flipped from election uncertainty to resounding consensus (anecdotally) that now the economy will be fine, inflation will be reversed (let’s never mind that it’s already been slowly reversing all year, per plan) and the democrats ‘tax and spend’ regime is dead and buried.
Well, the pro-tariff, pro-tax cut, pro-deregulation regime is going to be a mixed bag of economic positives and negatives. Corporate tax cuts are good for businesses and theoretically, the stock equity in those businesses. So too will be deregulation in certain industries.
Tariffs will naturally drive up inflationary effects* because the US does not have nearly the manufacturing base (anymore) to procure much of what it needs in-house. Not by a long shot. Our suppliers, most notably China, have a big lever on us. Re-shoring is not a one-year process. It’s not even a 1-term, 4-year process. It’s a generational process. A note for newer subscribers that I spent much of my working life as a manufacturer, watching and adjusting to the long cycle of offshoring to the pleasure of Wall Street, the angst of the Everyman and in my opinion, the economic near-destruction of the United States.
Is that hyperbole? Well yes, if you think that using tens of trillions of debt to fund each unit of GDP is normal. It’s not at all hyperbole if you believe the opposite, as I do. Once again, the FACT of the matter; since the early 1980s the average unit of GDP growth is exceeded by the average unit of debt.
We simply have not yet reached the expiration date. And yes, I am aware that the Fed can create new funny munny at will. But it is likely going to have to create that money against an adversarial backdrop, the likes of which it has not operated under before. It is not a coincidence that the trend in Debt-to-GDP above began at around the same time that the disinflationary Treasury yield Continuum began its downtrend.
Here is a version of our usual 30yr Treasury yield Continuum chart expanded to date back to 1980, the point where the chart above began to rise. If the trend break foretells a trend change, which I believe it does, then what about the above? Would we expect what has been (a nation having exported much of its manufacturing base, merrily transforming trillions in debt to positive economic appearances) to still be? With the cost of credit rising, for every unit of credit/debt created by the Fed, there would be less economic benefit.
In other words, diminishing returns. In still other words, an economic counter-cycle, quite possibly featuring Stagflation, where prices rise in the US while the economy stumbles and eventually fails. In still other words, a post-bubble environment. The bubble in unfettered policymaking, that is.
* As often noted, inflation is not the ‘effects’ that people have dealt with since 2021. Inflation was the act of inflating the money supply, manufacturing massive volumes of currency units chasing finite assets and asset markets. Prices did not go up so much as currency units did. The supply of money dictated the rising prices paid by consumers, not to mention investors in equities.
Strategy
Frankly, the two charts above blow my mind when viewed together as part of the same narrative. They are not going to teach you this at Wharton. They are not going to teach you this at Goldman or Morgan Stanley. They are not going to teach you this as you pursue your CFA, which for all too many is a certificate in the ability to convince the public to put its trust in you as you take a commission and put them into the machine, into risk.
And for all those years/decades of the Continuum, it has worked fabulously. That is what is so profound (again, to me) about the charts above; their shear longevity and the fact that the Continuum broke trend in 2022 after robotic decades of decline and correspondingly, Debt-to-GDP just may have hit a saturation point in its efficacy in maintaining the economy’s positive appearance.
That is a troubling big picture, but here we want to talk strategy within this new macro. Strategy that takes place each day, week, month and year. I have spent years (since 2004, when I became enlightened that “bad” does not have to mean “bearish”) analyzing markets that were mostly signaling “bullish” despite the creeping macro disaster that has slowly moved forward, year after year, decade after decade.
That is why I am – speaking strictly as a nerd – super excited now. That trend break in long-term Treasury yields. The odds are overwhelming, in my opinion, that its implication is profound now that it finally arrived after all those robo-decades trending down (disinflationary). I do not want this to be the case. I am a feeling human with a family I love and friends I care about. But my job is to stow away what I want and analyze and report what I see and the conclusions I derive from what I see.
So here I once again ask you to please offer alternate or opposing views if you have them. This is no cult with some clown trying to transfix people to his doom-sayer’s world view. I am just a guy doing work, and that work is telling me profound things about the potentials for negative change in the coming years.
Hence, strategy. Both to preserve and protect and yes, also to capitalize. Again, that’s my job, like it or not. So let’s get to that job, maybe in less detail than usual because I’ve already used up a lot of mental bullets laying out the macro picture, which is the most important thing at this moment.
The strategy will be to continue on with the “through the election” theme, whether that means Monday (with the negatives shown above exposing a massively off-sides bull trade) or sometime next year (in line with the implication of the impulsive burst upward in markets, post-election). But aside from timing, the view is and has been that a counter-cycle is engaging as either the party in power would have secured another four years and succumbed to a coming recession, or left it in the lap of Trump.
Well, it’s in Trump’s lap and he’s not likely to stop it. Assuming he even could stop it if he took office on election day, the 2 month lame duck period is a clear and present danger, as noted above. The market could continue pumping on emotion, hope and momentum. But the economy is a dead man walking and the counter-cycle is in play. That’s my view. Right or wrong.
Precious Metals Strategy
Big picture bullish. Gold is always of value in a monetary sense. That is because gold is an anchor, holding the ship steady in stormy seas. If the implications of Debt-to-GDP and long-term yields are what I think they are, it is going to get stormy indeed. Not tomorrow. But in the coming macro over the span of years.
Silver is gold’s sidekick, an impetuous metal asset that often leads the sector, has more inflationary sensitivity than gold and more industrial uses as well. Silver could out-perform if the dominant macro view is Stagflationary rather than Deflationary. Opposite if we go down a deflationary drain, as it would drop much harder than gold.
The miners will simply want gold to out-perform copper, oil, stonks and peoples’ spirits and hopes for prosperity to maintain the bull market. That is all in play, even after gold got croaked last week and the Teflon Don, AKA the stock market, got bulled.
Gold got a fair pullback to its SMA 50. The correction is not conclusively over, but it is now a valid routine pullback within a serious uptrend.
Silver looks like a buy here at 31 (for those looking to position) and an even better one at 30, both support levels, after its pattern breakout, which is still in effect.
The HUI Gold Bugs index is sitting heavy on the daily SMA 50, the channel bottom and lateral support. A valid correction end point. But please recall that the uptrending SMA 200 is valid as well within an ongoing bullish situation and it has not been tested yet on the rally from March. At some point a test of the SMA 200 is likely. Forewarned is forearmed and all.
Conveniently, a decline to the daily SMA 200 (277 and rising) above, would drop Huey to clear lateral support at the 280 area, shown as clear support on the weekly chart. MACD is looking a little funky, not in a good way. The DUST hedge may be added back if the correction proves not yet done by slipping support above or bouncing to the SMA 50 above.
The big picture monthly chart is as it has been; bullish. A test and even a marginal break of the channel top would be normal.
I am going to be patient and consider either hedging again or in a more pleasant scenario for the bulls, add to positions for a next leg up. The short-term downside may not over. We should have some clarity on that coming this week.
Gold Stocks & the “Resources” Trades
But the TSX-V index is still in rally mode, I am long copper miners and a few other commodity/resource areas and the precious metals are at a valid pullback point, from which the rally could resume. It is better for the sector, especially the explorers and juniors, when the wider resources trades are going well.
In this regard, long-held AE.V (taxable shares will go long-term in February) exploded back up to its highs. MAI.V is grappling to firm up after a long downtrend. Other smaller gold stocks I hold could also have a tailwind.
Interestingly, Uranium stocks (including currently held NXE) look technically okay despite the price of u3o8 ticking new lows in its ongoing correction. Maybe the stocks are telling us we can anticipate a good low in Uranium at the 65-70 range.
As for the copper miners, COPX was added on the drop and hammer at the SMA 200 (black). It popped. It dropped, and it ended the week intact at the uptrending daily moving averages. MACD looks coiled for upside. The SMA 200 would be a caution point.
The above are just a couple of examples of how I am viewing the wider commodity/resources trades. The story goes that the cyclicals (incl. Industrials, Materials, Financials, Energy, etc.) are Trump trades. Speaking of Energy, XLE was also added last week and this to me is a fine looking daily chart, holding the uptrending SMA 200, starting to bend the SMA 50 upward and RSI and MACD green. It gives the appearance of a sector that took the first impulse higher on Wednesday.
Stock Market Strategy
Frankly, I am caught in between the two options noted at the beginning of the report. There is valid reason to believe that pure market momentum dynamics can keep the bull going after the initial up-thrust and there is valid reason to believe that a contrarian bear play could begin imminently (likely pressuring sectors noted above as well).
If the bear engages with the battered but not broken VIX divergence I’ll be prepared to sell, taking profits and limiting losses. If the MOMOs hold sway after the initial up-thrust, I’ll continue as is, considering “Trump Trades” and other market areas that appear aligned with the current macro.
I am also using daily charts to either hold or abandon positions. In the case of CLOU, I held despite the obvious overbought situation and proximity to target (23) per the original NFTRH+ update on October 28, because it is in a taxable account, which gives me more patience in not taking the profit.
But more to the point, I am using the health of the CLOU chart as a reference for individual related holdings like ZM, DDOG and the recently added SNOW and NET. Just taking it week-to-week folks, ready to hold or sell as incoming information directs.
At this time and insofar as I am in the market (the Fed cheapened cash again last week, but it is still paying income and is still the best risk manager outside of a long-term gold holding) I’ll respect the bull/bear options noted above in the near-term and always keep in mind the larger macro, which is indicated to shift post-bubble counter-cyclical. Again, it’s not me saying that. It is my interpretation of the indicators I use saying that.
Let’s close a slightly abbreviated, conversational report here after doing significant in-week updating last week. The post-election period promises to be interesting, one way or the other. 2025 does too, as we transition to a phase that is contrary to most of what the vast majority of investors have been trained to believe, abide by and invest by.
Portfolio
Gold is long-term risk management & monetary value/stability in a balanced portfolio.
Taxable Account
In order of position size.
Just waiting for the market options noted above to declare while holding some positions. This account will favor risk management over speculation and it will also favor longer holds on the items it does hold on to for tax purposes. All things being equal of course, which they often aren’t.
Roth IRA (non-taxable, no contributions)
The IRA’s channel buster failure is still in effect. If gold stocks were to take another leg down I’d expect a test of lateral support at least. I will still plan to do all I can to avoid a trip to the lower channel line. Hedging would be the primary tool, for gold stocks at least, as I don’t want to sell as long as the greater rally view is intact.
Cash is 81%, which feels about right for me at this time.
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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