Summary
US Stock Market: SPX target is 6180. No change. SPX rolled over a bit last week within its bullish trend and Tech and Semi used some happy stuff out of Broadcom to end on a bullish note. The market continues to rotate its way to whatever top is ahead. We could see a speculative upside surge, taking out the SPX 6180 target. But for now it’s rotation city, with Semi/Tech getting a pop last week.
US Market Sentiment: Structurally over-bullish, as it has been all year. May finally line up with a contrarian bear opportunity in January, or Q1 – H1, 2025. Note that by this measure from Sentimentrader, gold is also still vulnerable.
Global Stock Market [per last week]: Under-performing US on balance, would benefit relatively if USD weakens and declines, or remain in under-performance mode if USD remains firm. China/Asia are a focus for 2025, insofar as a bull view can be extended to stocks. Making no such assumption right now.
Precious Metals [per last week]: The macro-fundamentals for gold and the miners are still in progress and still trending positive. Current correction in gold and the miners not indicated to be over (potential ‘C’ corrective leg down), but is still indicated to be a healthy one within a larger bull rally. One positive internal for the miners: The Gold/RINF ratio is positively diverging HUI and the gold stock sector. A more intense version of a positive divergence preceded the lows and hard upturn in the miners back in March.
Precious Metals this week: the ‘C’ leg down scenario gained more ground last week. Let’s keep in mind the average seasonal, which bottoms in December-January, post-tax loss season.
Commodities [per last week]: Show me a weak USD and Gold/Silver ratio, and I’ll show you more commodity and resource related assets looking to bull. Right now, on balance commodities remain in clear under-performance mode. TSX-V index, which carries speculative commodity-related stocks, is technically unbroken. Keep an eye on it for clues.
Commodities this week: USD and GSR firmed up more. Commodities are generally not the place to be if that continues.
USD & Indicators [per last week]: The US dollar is in rally mode and we currently watch to see if it pulls back or reasserts its bull phase after making a key higher high. Importantly, if the Gold/Silver ratio convincingly follows the USD in a given direction, the messaging will be USD & GSR up = market liquidity problems or… USD & GSR down = year-end party including currently under-performing items like commodities, EM/Asia, etc. Other indicators are as they have been, with complacency at an extreme (VIX & High Yield spreads are submarines), the 10-2yr Yield Curve continues to be on a steepening trend and is current de-inverted. In other words, the indication is that the journey to the next economic bust is in progress. With Treasury bonds currently in rally mode, the indication for the backdrop is disinflationary and Goldilocks. This is interim, not long-term in my strong opinion.
USD & Indicators this week: USD and GSR each firm up more. Other indicators remain as they were, with the yield curve firming and complacency still very much in force. A bad combination. One notable difference this week is the state of Treasury yields, especially long-term yields, which have risen sharply. See the report below for much more on the potential implications.
The general situation is unchanged: High risk, but with risk not yet actively realized.
NFTRH 840 shifts gears, talking little about individual sectors or equities, and summarizes the macro situation as I currently view it. We had five NFTRH+ updates last week, primarily discussing the precious metals and the indications within (Gold/Silver ratio, US dollar, etc.), which are important to the wider markets as well. Below the writing starts, and it does not end until I’ve (hopefully) expressed what I felt needed to be expressed during this time of speculation and volatility in some areas, pre-Santa, and into what figures to be a lot of energy into presidential inauguration day during a time window that sees a lame duck presidency wrapping up its operations.
When Will the Mania End?
Personally, I’ve had different potential answers, from “to the election” to more likely, “though the election”, to H1, 2025 (more likely Q1, 2025 around inauguration day). Those were and are guesses based on logic and incoming indicator data.
Much of this view was due to the government in power doing all it could to stay in power, benefiting favored areas of the economy through debt spending and showing robust government hiring data each and every month except April. To boot, the administration had Yellen in the side car with a little toy phone that connects directly to Jerome Powell’s line. Powell, who just happens to have begun a rate cut campaign at what appeared a strategic point, pre-election. Captain Obvious states that keeping the stock market bulling was a primary objective.
The view includes macro complacency (forward risk) indicators like High Yield spreads and the VIX, and active risk indicators like Steepening Yield Curves to divergence by the 2yr yield to the Fed proxy 3mo. T-Bill yield, which forecast the last two major bear markets. We can get further afield and talk valuations, insider selling intensity, GSR/USD combo and several other items that would indicate an oncoming end of the mania.
But let’s rummage through the St. Louis Fed data base for other items of note. This chart shows that as M2 money supply goes, so generally goes the stock market. The graph shows the gentle up-slope in money supply in 2024 with SPX sloping up even more. “Feed me!” says SPX. Clearly, the Fed printed the bull phase that is ongoing to this day (2022 was a correction, not the bull’s end) during the monetary panic of 2020. As you can see, 2024 has seen a gentle up-slope in M2 while the stock market has bulled. That makes sense during 2024, a year when market liquidity was of the essence for those in power and trying to stay in power.
But who is feeding the stock market during this brief window of time between the lame duck presidency and the incoming angry vulture presidency? My guess, nobody. However, with November payrolls coming in stronger than expected (subject to revision), that theory has not yet proven out. My guess is that the Biden admin had the stimulation gun irrevocably loaded before the election and November bore that out.
The Fed is not currently leveraging its balance sheet in service to the economy. Quite the contrary, it is easing from the panic levels it attained from 2020 to 2022, as it desperately tried to create, and eventually succeeded in creating the next inflationary macro (and associated problems). The slope of this graph is not pointing to ample market liquidity. Quite the opposite. Right into Trump’s lap it slopes.
Notice how the 2022 market correction began just as the balance sheet topped out. The correction logically came in unison with its decline. But the balance sheet has continued to unwind while the stock market has re-bulled (in line with our 2024 election year thesis). The Fed flipped somewhat dovish on Fed Funds policy, but behind the scenes it appears to be systematically withdrawing the real inflationary machinery, which is its holdings of and manipulation of US Treasury bonds, among other assets.
So a strong conclusion is that it has been fiscal (government) policy driving the 2024 bull festivities. Ah, but that government is lame ducking its way out the door. There is about a 2-1/2 month gap during which neither the lame duck nor the angry vulture may be willing (duck) or able (vulture) to actively pump a market dependent on the kindness of agenda-motivated politicians.
Yet the Federal debt has now ticked over $35T and when Trump gets in office his agenda, by definition, targets even higher debt levels, just as it did both before and during the pandemic. From the perspective of the macro and the cliff this country will one day drive over, it’s both parties alternately driving the same clown car.
And once again, our favorite companion to the Public Debt graph above, the vaunted GDP of these mighty United States of America. Virtual twins. One reflecting the “strong” economy and the other reflecting the vapors of unpayable debt drifting skyward. It’s no timer, but it is not healthy. In a purist’s view, it pretty much puts the lie to everything, other than in Wonderland.
When will the mania terminate? On inauguration day? Later in 2025? No time soon as the ongoing macro parlor trick – decades in existence to this point – lurches on and on (blowing up NFTRH’s bearish thesis)?
The correct answer is that it will terminate when it terminates. It could terminate – HARD STOP – in a deflationary unwind of leverage (and the system as it currently exists) or it could terminate after ever-increasing inflationary pressure that sees more and more debt-tinder thrown into the flames of an increasingly hot situation, resolving finally in a hyperinflationary Crack-Up-Boom.
Doomsayers have said their doom for decades and… still a bubble. The doom is because of the debt, because of wars, because of valuations, sentiment and most recently, because of inflation. But inflation is THE macro parlor trick (government, fiscal and Fed, monetary) that has worked to this point in keeping the old fable… “the stock market always goes up again” in play after every attempt by the macro to sanitize itself of these economic vampires.
The poor get poorer. The middle get lower, the upper-middle upper can make gains and the rich… well, you know what they do. The game is rigged in their favor. Sound like a Socialist, do I? Well, I don’t care what I sound like if I am writing the truth.
The truth is that per the graphs above, the economy runs on debt creation and the manipulation of that debt in service to the economy and by extension, the stock market. The upper middle and rich own stocks. The system of manipulating asset markets and manipulating the economy enriches some and disenfranchises many. This not my opinion. It is the coded in fact of how the system runs.
I sense that a large percentage of Trump voters simply picked what they viewed as the less bad option, as he will cut taxes, deregulate, slow immigration and impose tariffs. A lot of moving parts there, but coming tax cuts (corporate and otherwise) will come with the government’s ability to create new debt. This is where the bond market’s clear rebellion in 2022 comes into play.
The 30yr Treasury yield is in a bull flag on its monthly chart. The flag, in its downward bias, represents the disinflationary “Goldilocks” phase that we had anticipated and have been following. If it takes another leg down within its flag-like structure, it could represent “Goldilocks” party extension or increasing deflationary fear. If yields were to pull back far enough (our downside limit is the up-turned “limiters”, the monthly EMAs 100 & 120, currently at 3.3%) it could give at least some credence to the next inflationary operations by Fed and government.
If the flag were to break out to the upside sooner rather than later, a world of pain could visit the incoming president and the asset markets and economy he’ll preside over. The Fed, in my opinion, would be rendered nearly useless as it would not keep cutting rates with the bond market driving them up to new and uncharted territory within the new, post-2022 trend. Rising yields would also complicate (at best) any Fed Treasury bond manipulation, aka Q/E, aka MMT, aka TMM (total market manipulation).
That would leave a debt-spending government and folks, the guy we’ve elected not a fiscally conservative businessman who will run a sound economy. He is a debt-leverager seeking growth at all costs. Again, fact. Not opinion. Key word: “costs”.
As it stands now, long-term credit is more expensive than it has been since 2011. A disinflationary pullback with weakening economy and markets could instigate the next inflationary action without much fanfare. However, if yields break out here and now, the economy sputters and the yield curve indicates oncoming “bust”, I don’t think the tried and true tools that monetary and fiscal policymakers used over the last 4 decades will work very well, if at all.
So another answer to the question “when will it end?”
How about this answer? It already ended, in 2022 with the vicious break in the gentle disinflationary trend in long-term bond yields. Some market effects (depending on interest rate sensitivity) of that are and have been in play since 2022. But think about all the other effects – which I for one cannot pretend to quantify – that are incubating, waiting, straining, stretching toward their breaking points, toward their turning points. Think about today’s happy macro picture (on the surface) – and folks, they sure do have this pig painted with bright red lipstick – as a dead man walking.
Changes will come, but I am taking educated guesses on the timing. Have been all year, and so far it has worked out from the perspective of either staying bullish or not going bearish. But the concern is that some events just erupt as something supportive, or several supportive somethings, hit breaking points and no longer are supportive. Leveraged by pure debt on the bottom line, those somethings could be like dominoes when they start breaking.
Current Strategy
I have seen enough to begin pulling in the speculative fishing lines and sit back for a bit and enjoy a more risk-managed perch. Against the speculative backdrop there have been some very profitable trades, like the Cloud/SaaS/Remote/Security stuff and before that in the precious metals, which let’s remember, led much of the post-February 2024 rally. I have poked away at the commodity/resources stuff, but it has been generally impaired by the strong US dollar and the neutral (now bull-biased) Gold/Silver ratio (GSR).
I am going to adjust my strategy according to the USD/GSR combo, mainly, along with other market signals. Hence, with their combined strength last week the strategy of risk management logically increased. I will remain open to the opposite situation, where both Horsemen could plummet and instigate a wild and perhaps final phase of speculation and bullish bravado. But that is not what was signaled last week. So folks, I am a weather vane of sorts. The market’s internal indicators, led by the USD/GSR combo, will blow me in whatever direction is indicated.
The goal had been to make some money by playing the game that I felt government (primarily) had set up in 2024. But with cash still paying good income I played it nimbly and to no large degree. Over-bullish sentiment has been and still is structurally negative from a contrarian point of view. But 2024 was a great lesson in how poor a timer that is. It is the condition that will be in place at the next important top.
As for the gold stock sector, which still has my interest in the big picture, we have noted all year that the general positive correlation (and earlier leadership) of the PM complex was not the unique suit that will be needed for a longer positive view. The PM complex would be vulnerable to a broad market top for that reason if it is not already negatively diverging the broads in its current correction (the precious metals often lead other markets).
Bottom Line
Risk management comes first. One primary indication of risk is the USD/GSR combo. Last week each of them made bullish moves by daily charts. The weekly charts show an inconclusive situation, however, with USD threatening to break out but not yet clearly doing so, and the Gold/Silver ratio still going sideways. So, while I will go with what each week presents (potentially getting whipsawed), I will also keep in mind that these two could fail and ignite a furious rally, especially in the stuff that has been most impaired by their strength. That would be the precious metals and commodities/resources.
A final picture is of the widespread complacency still in effect among market participants. It’s one we’ve looked at a lot lately, because it carries a warning that the average participant is sound asleep to the prospect of risk while the VIX has not made new lows and indeed is currently at a higher low to the stock market, which is busily bulling its way to target.
Portfolio
Gold is long-term risk management & monetary value/stability in a balanced portfolio.
Taxable Account
In order of position size. The account is stuffed with cash and holds a few items. I sold some and trimmed NGD and NXE. If market elements come into place for a final upside in some or even most asset areas, I’ll participate, with a view of “ending stages” which, in some market cases can include upside bull blow-offs (e.g. silver in 2011 and on a smaller scale, what the downtrodden Cloud/SaaS stuff has done recently, although it is not yet indicated to have topped).
Roth IRA (non-taxable, no contributions)
Some may think it is a silly to illustrate the chart of an actively managed portfolio, since I have control over everything it does. For example, I could sell everything right this minute and stop that double top in its tracks. But this picture does illustrate what I looked at on Friday when I began throwing items overboard in service to raising cash (and risk management). As I am not short anything, more items could be sold this week… or, pending market indications, I could go the other way. But it will all be against a more structural regimen of risk management until we finally have an upside termination to high-risk markets and risk is cleared by a strong correction, at least.
Cash/equiv. is 90%. Right where I want it. Now bring on USD/GSR and other indications. I’ll go which ever way they instruct. But as usual, it will be with a larger view of risk management. Bearish speculation is not yet indicated, at least for less patient or committed would-be bears like myself. Gold stocks held, both here and in the portfolio above, are the ones I really don’t want to sell. At least not in the face of what is still just a normal correction.
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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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.
