Notes
The Summary segment is omitted this week because of time constraint. But each segment below has a Bottom Line to it. That should suffice for now.
The Bottom Line for the entire report is that we are watching to see if the holiday week slippage by USD below its breakout point is real or not. If it is and the Gold/Silver ratio also weakens we could be looking at the fuel for a perhaps final broad bull phase, including commodity/resources areas.
Individual stock charts are not presented this week because as noted in the trade log, a public post and maybe some updates, my tack of late has been to take profits and ramp up risk management in broad stock market positions. Aside from profit-taking, that risk management has prioritized cash of course, but also shorter-term Treasury bonds.
We’ll look at the Treasury market in a segment below. But ironically, if bonds continue to rise in the interim, it could provide a tailwind to a year-end party atmosphere. This week’s report fleshes out that potential. The bullish potential is only viewed as a 6-8 week thing, if it comes about. Read on, and let me know if you have questions. We’ll want to get the next month or two right.
US Stock Market and More Market Indications
On Friday this public post discussed some indications toward a coming market top, including some that are not part of our usual ongoing market risk profile. Now that we are “through the election” we consider the contrarian bear potential surrounding the January 20th presidential inauguration time frame.
Strong Contrarian Bear Potential Into Inauguration Day
The bearish chart of the Semiconductor index looks almost too obvious. Indeed, a gentleman I met at Thanksgiving mentioned it. So he, I, you and legions of chart gazers the world over see the Head & Shoulders pattern. That’s an argument that it won’t play out. However, “play out” in this case means crack the neckline and tank to the measured target of 2645. But what looks more doable is a drop to the neckline which, even if it holds, is still 13% below the current level.
What can’t be debated, however, is that SOX has been dropping in terms of both SPX and NDX. The trend has been down since mid-summer and NDX, the 2nd link in the SOX > NDX > SPX leadership chain, is looking pretty darn suspect as well. The weakness in the Semi index is a bad sign for the economic cycle as well as the US stock market.
However, the ratio of defensive Healthcare to the broad SPX (SPY) has not yet arrested its decline. Unless the market thinks that Trump policies are going to impair the Healthcare sector in particular, this is an extreme warning on a lack of risk awareness among participants. After it turns up from its extreme decline, the indication would be that risk is going “off” in the markets and a bear could be oncoming.
As for Trump, it is a viable concept that he could be the reason for the extreme reading, since the only failure of this market ratio indicator during the chart’s history was 2012-2016, which, if memory serves, was a time of implied political benefit to the H/C sector as a whole. This could be the equal/opposite dynamic happening now.
We usually update a daily chart version of the chart below, but this week let’s expand the view to a weekly time frame to get a look at the longer-term situation in gold’s relationships to silver and some cyclical markets.
First a little background for those new to these indicators. When gold (less cyclical, less inflation sensitive, more of a safe haven) out-performs silver (more industrial/cyclical characteristics, more subject to inflation, not a safe haven), the indication is disinflation at best, and oncoming liquidity/deflationary problems at worst. The Gold/Silver ratio is sideways since the recovery out of the 2020 liquidation, but notably well above clear support.
Gold/Copper and Gold/Oil show a strong disinflationary trend and an increasingly beneficial macro for gold mining operations, as mines run on energy, materials and human beings. All of those things are cyclical. The indication is counter-cyclical and not inflationary, which we have for years noted amid the din of those touting gold stocks for inflation protection, is the proper macro backdrop to be a longer-term gold mining bull. It’s on its way.
Gold/SPX had been moderately rising in 2024 until America got great again. I expect this greatness to be fleeting. The ratio is fine above noted support. Patience.
Gold/Global is purely up-trending now. The balance of the indications on this chart are that the cyclical, risk-on macro is terminal. But charts and indicators can make you see things and come to conclusions (like the one I just stated) well in advance. So, patience. We are currently evaluating the potential for a market/macro top by or around 1.20.25. But you know the markets; they can stay irrational longer than you can fight them. So let’s be focused but also open minded with respect to timing.
Bottom Line
As noted over the last couple of months and again in Friday’s public article, the measured target for the S&P 500 is 6180. It’s just a measurement and it’s just a target. But it is the next objective for the bull.
There is enough risk in this market to halt the damn thing at any time before that and there is enough irrationality and momentum in this market to push it beyond that. Amid the “America great again” hype of the incoming de-regulator, tax cutter and inflator (and all around mayhem magnet), there is a major potential for a contrarian setup. That can be dealt with through cash and, interim to the next inflationary phase, the highest quality bonds, which are short-term Treasuries.
US Treasury Bond Market
As you know, we use the bond market consistently as a guide for other markets and the macro environment they exist within. Our best picture of a macro that was but no longer is… is the Continuum (30yr Treasury bond yield). What was (a decades-long easing in the yield, implying a disinflationary macro) no longer is.
If the trend since the 1980s had been disinflationary, the break of that trend would be inflationary. But it is more complicated than that. The disinflationary trend permitted (licensed) all sorts of inflationary actions by the Federal Reserve (monetary policy) and various government officials (fiscal policy). So our current theme is that now, at best, inflating authorities will be met with much less pleasant results than were routinely expected during the bubble decades.
I will not buy 30yr bonds, even for a trade, because I don’t buy the long-term debt of hopeless inflators like the US government (along with its global fellows, who let’s be honest, do the same thing on balance). I use long-term bonds as indicators only. The big picture indication is inflationary, but the interim view is counter to that.
Here is the daily chart of the 10yr yield (the 30yr is in a similar state). Note the lower highs and lower lows since Q4, 2023. That is an intact downtrend and disinflationary signal. After the recent bump up in inflation signals the market is calling off the inflationary dogs and settling back to the disinflationary (interim) trend.
The 2yr yield is obviously in a downtrend, as it has been leading the Fed (by diverging the Fed Funds rate and T-bill yields) to go dovish for a year now. After the recent bump it too is turning back down.
The yield curve that employs both of the above, the 10yr-2yr, is obviously in a daily chart uptrend. Which means that it is on a “steepener” as opposed to the “flattener” into the 2023 double bottom of extreme inversions. Of late, considering the resumed declines in nominal yields, the curve has pulled back and even ticked a slight inversion. This is because America is great again and the market celebrated with a Goldilocks theme.
When the curve resumes its steepening it will do so under deflationary or inflationary pressure. My favored view is disinflation to deflationary, with market liquidation of some magnitude. Then inflationary after that, potentially many months or a year+ out.
Such a new inflation phase would come after policy heroes in government (Trump never met a debt-leveraged inflationary action he did not like) and the Fed likely step up to the old tried and true market manipulation apparatus, but find that the lever does not work as effectively as it once did (during the decades-long disinflationary trend of the Continuum above), if the lever’s handle does not break right off when pulled.
Okay, enough with the theory. Here are the daily charts of the two Treasury funds I own (SHY for quite some time now, and IEF, as of last week). Note that these charts include dividend income, which is factored back into the price on a monthly basis.
As the 2yr yield declines, SHY (1-3 year T-bonds) will rise, paying income along the way. As noted over the last few months, I want to increase short-term T-bonds because the Fed is aiming to cheapen cash (with the new president at the ready to hector and harangue them to do so every step of the way).
Being the conservative sort I am, I was only willing to go out to the 3-7 year range, (interim) positive bond view or not. The 1-3 year above is obviously in an uptrend and the 3-7 year held above its important trend marker at the SMA 200. This feels like an okay repository for a small amount of my cash equivalents (I overwhelmingly favor 1-3 and cash because I am not trying to make bank here, I am trying to manage risk and have some income while doing so).
Bottom Line
Treasury bonds continue to indicate an interim disinflationary backdrop within a new inflationary macro. But it is more complex than that. Policymakers used a disinflationary macro to inflict their inflationary shenanigans upon the [not] free markets for decades. They were given license by a bond market signalling “nope, nuthin’ wrong here… do as you will, boyz (‘n girlz)!”
Now the license has been revoked by the massive trend break by long-term yields in 2022. I continue not to try to predict whether the longer-term result will be a more corrosive inflation problem or perhaps, finally, a rollover into a real deflationary shit storm. The favored view is that they will try to inflate, they will inflate, but the inflation will not be as well behaved as the post-2000 period, the post-2008 period or the post-2020 period.
Meanwhile, Treasury bonds in the 1-3 year range are a relatively comfortable way to make some moderate income while minimizing risk. I am using these bonds increasingly in combination with cash, which is still paying out income to a decent degree as well (for now).
Precious Metals +
First let’s note that in the short to intermediate-term, gold and the miners will prefer a macro that sees the above noted situation in bonds, where yields are declining, not rising. That means weakening policy, which theoretically means a weakening currency. If bonds are on a new upturn, it is a macro-fundamental tailwind for gold and gold stocks as well. Some day that could change, if disinflation goes deflationary.
Such a deflation scare would probably tank the precious metals complex (into a buying opportunity). This is the core of our long-term view for the gold mining sector, because such a buying opportunity would come while the miners’ fundamentals scream higher (e.g. Q4, 2008 or in microcosm, Q1, 2020). But for now we are still managing an intact bullish situation.
Gold is in what some may view as a Head & Shoulders pattern on the daily chart. I don’t view it that way because one big down day should not comprise the right shoulder. We are coming off a holiday week, so who knows what kind signal static is in the markets? As such, I don’t overly trust that big down day to be meaningfully bearish, just as I don’t trust the two bounce candles after it to mean much for the bullish view.
The daily technical situation is that gold took a healthy pullback and retraced a Fib 50% of the rally off of the previous consolidation low. A major correction would take it to 2400 and a test of the SMA 200, which would still be within a bullish viewpoint. But the 50% Fib coincided with a lateral support shelf and that qualifies as a valid – if routine – and healthy correction as well. RSI has clawed back to positive at 52 and MACD has a sneaky little potentially bull trigger going on. If gold takes out the SMA 50 and holds, it could be back on its way.
The operating target for gold continues to be 3000+, off of the measurement of the huge Cup that had its Handle broken back in March.
The big picture is technically excellent, as this monthly log scale chart shows. Gold got a little frisky at the top of the green channel and took a good knockdown within its strong bull move.
Silver’s daily chart situation also shows a small H&S pattern that could be interpreted as bearish. But this one looks a little more valid than gold’s. Regardless, the daily trends are up and we are looking for a buyable low. It is possible that support at 30.50 will hold, but a drop to 29 and the SMA 200 would be a clearer buy opportunity, in my opinion. If silver takes out resistance at 31.50 and the SMA 50 at 32 it’s probably back on its way.
On the bull side, the pattern that formed from the May high to the October high could be a small, bullish Cup & Handle, with the Handle still in process. We could have quite a party if this plays out. Watch for a Handle break and takeout of the SMA 50. I will have SLV, CEF or PSLV at the ready. Some silver miners of note would be HL, SVM (bombed out to fill a gap after financing) and ABBRF (ABRA.V). I hold the first and last, and would likely add SVM back. Also, if I remember correctly, WPM is a royalty/streamer of about equal parts gold and silver (?).
Daily HUI shows the channel breakdown and a near test of its uptrending SMA 200 (GDX has tested its SMA 200) and while RSI and MACD are still in the red, MACD does have that sneaky looking trigger going on, similar to gold.
HUI weekly has made the requested “healthy” correction already by threatening the channel breakout and testing clear support around 280.
HUI monthly really could not look much better after the post-breakout reversal and shake out. Nothing is a sure bet, but this index is technically ready for the next leg up after the sector’s over-bullish and overbought readings were tamped down.
BPGDM has moderated but not pulled back in a real and painful running of the bugs. But it’s a bull market, and the rules are different and possibly much more lenient than in a bear market.
Check this out. The Gold/RINF ratio is flashing a positive divergence to gold stocks, not to the extreme of last February, but notable nonetheless. Folks, I am getting bullisher with every chart I look at in this segment.
Although, moderating the excitement, these charts need to see some improvement before we trigger a serious bull view. I am “this” close to shedding my partial miner hedge (DUST).
Bottom Line
Gold, silver and the miners have been big picture bullish. In the developing macro, gold and gold stocks are favored over silver and silver stocks. But in the shorter-term, we’ll watch silver as usual. If we go full “party time” this holiday season (into 2025), silver would probably lead. The Gold/Silver ratio was shown going sideways on a weekly chart in the opening segment. Here is the daily. This will need to break down or at least weaken for a party featuring anti-USD type inflation trades (including silver and insofar as inflationists infest the gold market, gold stocks).
Similarly, the US dollar would have to fail its spike rally, which it made a hint to do last week. One (IMO) strong possibility is that USD will drop during a final bull phase of holiday cheer. Party on!… (until inauguration, perhaps?). Then, when the party does end (January? Q1?), the USD “higher high” may act as a sentinel for future USD bull activity, likely accompanied by the Gold/Silver ratio, resulting in a market liquidation.
Sound like a plan?
Last week was holiday b/s week, market-wise. So it will be interesting to see if this breakdown in the buck is real. If so, and if the GSR above eases, we could have a good rally, and not just in the precious metals.
Another bullish hint is the intact state of the TSX-V index, home of the most speculative commodity, resource and precious metals stonks. The darn thing is bullish after holding on a test of its uptrending daily SMA 50.
Regardless of whether the short-term pullback in precious metals (and pressure in other ‘anti-USD’ areas) is over, elements are in place for the correction to end. The precious metals bull phase has not nearly been threatened and that would be the case even if the complex were to pull back to more extreme support (and sentiment) levels. Bullish.
As for the broad macro that the precious metals and everything else have existed within this year, it is on a timer (T-Minus… however many days to January 20 or thereabouts).
Global Markets
If USD breaks down, expect the party to go global, possibly even to outperform US stock markets. While I might continue to favor EM/Asia in a weak USD environment, the balance of the world (ex-US) has thus far held its uptrending SMA 200 in what looks like a buying opportunity for global bulls. Not, in my opinion for long-term investment, but for a trade.
Portfolio
Gold is long-term risk management & monetary value/stability in a balanced portfolio.
Taxable Account
In order of position size.
If I see certain things this week that continue to slant the picture bullish (ref. report above), I will get rid of DUST (hopefully at a profit) and add to not only gold stock positions, but other ‘anti-USD’ type stuff in the Commodity/Resources/Global areas. This would be for a year-end party into 2025. Meanwhile, cash levels are very high.
I want to carry forward the theme that we could get one final expression of greed before a contrarian opportunity manifests that could provide a profit-taking/cash-raising/shorting opportunity just as America maxes out the “great again theme” sometime around the January 20th inauguration. Again, it’s just a plan. But it’s one I am taking seriously.
Roth IRA (non-taxable, no contributions)
The IRA’s chart looks good, having gotten back above lateral support. It is eyeballing the channel top, assuming its correction is over. I am not making that assumption, but as with the macro party view, I am favoring that view over the next 6-8 weeks.
Cash/equiv. is 81% and will be reduced if the broad rally resumes into a perhaps final expression of greed. But I resolve to understand what it is, every step of the way. What it is not, is a healthy and long-term bullish situation.
That is why I’ve been resisting the urge to feel smart and hold big winners (SNOW, ZM, CLOU, DDOG, NET, etc.) too long. In this non-taxable account, profit-taking is almost demanded in a high risk environment. Now, if the US dollar takes an interim decline we could see rotations again for the bull’s final stages. The Cloud/SaaS/Remote/Security stuff does not care as much about a strong/weak dollar. The commodity/resources/global stuff does. I’d consider rebalancing from the Software stuff to more Commodity/Resources stuff.
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 on X @NFTRHgt for notice of updates.
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