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Holiday Editions

This week and next, during the Santa seasonal, we compact NFTRH reports to a briefer, more focused format and discuss the most relevant topics, given that market indications like TA and internals can be somewhat unreliable in low volume, holiday-influenced markets. We will still do TA and indicators, but it’s silly season, and I want to more briefly zero in on key items without introducing too much noise before the dust settles in early January.

Santa

Here he comes. Last week we witnessed the type of shenanigans that can ensue during the holidays. FOMC met, firmed up it’s interest rate stance a bit (in line with our expectation), and members rode off to whatever high society holiday reveling they’ve got planned. Enter Santa, and his “seasonal”, most often described as the period between Christmas and New Year’s eve. For our purposes though, we are in the season now, exiting tax-loss selling season.

Last week I could not help myself and initiated three short positions, NVDA, DBC and SPY. Looked smart on Thursday and not so much on Friday, as the markets recovered (because of course they did). Santa, all I want for Christmas is pure market signaling, so I can effectively begin managing 2025 in a rational and eventually bearish way.

Santa:

“Ho ho ho… okay well, you are how old? And you still believe in me? I suppose you still believe in treats and sugar plum fairies at this time of year? I break my ass one night a year and then go rest for another 364 days. Anything that goes on in your markets is you humans and your machines. Oh, and don’t forget the milk and cookies.”

Well Santa, I guess what you are saying is that those treats could be bullish ones yet again? Okay, but there was the Christmas Eve massacre (mini-crash) of 2018. So, low volume seasonals can cut both ways? Eh, Santa?

The Fed dialed back its dovishness a bit last week. Due to the up-tick in inflation signals and expectations, they intend to slow the pace of rate cuts relative to the market’s expectations (but not ours, ref. the link above). So cash-based risk management still has an ally in the form of cash income, not just safety.

Because I added three short positions I now have perspective from that side of the market and in my gut I think “of course they are going to gun this mess!” But I am prepared either way. The shorts are small, longs are reduced and cash is aplenty and with the Fed being directed by the markets to slow the pace at which they go dovish, cash will remain a good risk manager that also pays income until such time as the economy and market signals degrade to the degree that the Fed decides to cheapen money once again in service to keeping the bubble intact. The bubble is in unfettered inflationary policymaking, and asset markets have to this point done as the bubble directs. They are the offspring of the policy bubble.

Indicators

• Yield curves are steepening and that condition can be either inflationary, deflationary or more likely, both at different times. It portends a coming “bust” side of the boom/bust seesaw. See Thursday’s public article for historical proof. We should keep in mind that the media were scaring everyone with the story of an oncoming recession back in 2022-2023 because “OMG, the curve is inverted!!”… so that when they give the all-clear now (as they began doing when the curve finally un-inverted back in September) we will know it is likely the opposite side of the same bullshit analysis. Here’s the September post claiming so in real time.

• With the market relief on Friday, both USD and the Gold/Silver ratio eased. Logical. Each remains perched bullish, however, and if that holds true the indication would be for market liquidity problems, emanating from the precious metals and inflation trades, on out to wider areas of the markets like the cyclicals and if we are get a real bear, eventually out into Tech and even defensive areas. For more on USD/GSR also see the first linked article above.
• Here is the updated status of USD and GSR. USD eased but closed the week in base breakout mode while the sideways-going GSR is most recently bull flavored. If these two go bullish together the market indications will be negative as markets live by liquidity and liquidity would be indicated to be draining.

• VIX & High Yield Spreads are complacency indicators and they have each woken up from a deep sleep. Again, it is Santa season and you can’t discount sugar plum fairies dancing through the markets, but at some point soon we’ll be through Santa and the market will have to rely on its internal signals once again. Here is the VIX, having made perhaps the first tremor of a future eruption from its divergence to the stock market. As we have been noting lately, VIX got battered but retained a stance where this divergence was still in play. Today it is very well in play. Again, it’s Santa season… so it is more than conceiveable that markets could use the short-term jitters from last week to instigate some short-term bull activity. But beyond that, this is a bearish picture from a contrarian’s point of view.

• High Yield spreads also took a pop last week. That is a lurch toward risk-off. But the lurch came from an incredible extreme low (high in complacency and speculative froth). This too could instigate some short-term happy Santa stuff. But it too could also be the first sign of an oncoming negative market phase. We have been waiting all year for VIX and HY Spread to join the actively bearish indicators like steepening curves, strong USD, the neutral/bull-biased Gold/Silver ratio and…

• …the divergence of the 2yr yield to the Fed Funds proxy 3mo. T-bill yield. The current divergence has been a humdinger, and I think that the fact that it has taken so long in development could imply a more severe bear market than the previous two cases. As to the current situation, the T-bill is still declining with the dovish (but pausing) Fed and the 2yr has been bouncing. 2007 saw a similar situation where the 2yr bounced while the T-bill dropped, they met and then the T-bill bounced before the whole mess rolled over into a bear market. The indication is that back then the Fed, which wanted to be dovish, was forced to firm up and re-hawk by the bond market. That was the end of the bull market. Something similar could be in play and nothing about the FOMC release contests that notion.

Folks, I am not trying to be bearish. I am not trying to cherry pick negatives. The negatives are there for the picking and the above are far from a comprehensive list of them. They are just my primary indicators. We can add market valuations and insider net selling to the list. Dog gone it, we can add a lot more than that too.

But you have my promise that I am not trying to be bearish because it is my agenda. I am big picture bearish because the indicators say so. If things change, the analysis will change.

Meanwhile, it’s a pretty good mental exercise having a bearish view and yet speculating bullish. But that has increasingly been the case this year. It’s good for the brain to have such exercise; keeps you feeling young rather than atrophying into biased or robotic thinking patterns. If the 2025 bear thesis fails, you know I will be the first to admit it publicly and I’ll also be the first to humbly adjust.

But here in Santa season, nothing has changed. It’s just a brief post-tax loss silly season. January into February may increasingly point toward what is actually coming with more reliable signals.

Market Technicals (Daily Charts)

All of that said, SPX appears vulnerable to close the week after not having quite hit the measured pattern target. It did not fill the downside gap at 5783 either. Hence, I hold my SPY short position. As a side note, that big green volume spike implies bullish conviction, eh? No. A look at a 1-day chart shows that there was a big red volume bomb to close out the day. Since it was an up day overall, the volume bar is green. But it is not meaningful to the bull case.

Gold is also looking none to stellar as it bounced toward resistance on Friday. The correction has put in a 50% Fib retrace of the rally from February, but the 200 day moving average has risen toward the 62% Fib retrace level at 2477 and gold not yet having exited its correction, those appear doable (and would be healthy).

If gold looks bad short-term, silver looks worse. I had previously introduced some noise about a potentially bullish Cup & Handle, but the situation morphed from that incorrect view back to what we were originally tracking, the formation of a potential Head & Shoulders pattern. If silver does not re-take the SMA 200 and noted resistance the situation will degrade as a legions of chart jockeys see and react to this bearish pattern. As a side note, when you hear some TA trying to scare you with “major” bear pattern talk, don’t let her. Why? See below.

Here is the longer view of the breakout from a “major” Inverted H&S from which silver broke out early in the year. While silver is in a series of higher highs and lows implying that it may hold above the August low, as good practice let’s also be aware that the pattern’s measurement would theoretically make a nice test of that Inverted H&S neckline. If so, it would likely be a table pounding buy area.

HUI has retraced 50% of the rally from February, where it is trying to find support. But the 62% Fib lurks lower at the top of a support zone, where I have added the ‘C’ wave projection we’ve been using for a would-be GDX final drop. Considering the poor look of the current technicals, I’d put more weight on the 62% Fib than the 50%. We’re looking at the 251 to 259 area. This, after Huey lost the black dotted breakout channel from the correction that began in 2020.

I do not think for a minute that we are not still on the next rally phase, but I do think…

The Global (ex-US) ETF had been in fine technical condition even after the long pullback from September to November. Then came the logical bounce from the support of the uptrending SMA 200. Then… a breakdown. While the situation is not broken (that would happen with a takeout of the August low), it’s a poor technical situation that seems to think the US dollar is going to continue rallying.

The Commodity ETF, DBC, which I am short, looks none too stellar.

But I didn’t short it for the view above. I shorted it because below the daily moving averages above and associated resistance on the chart above, it is technically vulnerable. It’s a small position that could be increased if the complex weakens further (in the face of a strong USD). Here’s a weekly chart view.

Bottom Line

It’s the holidays. You know it, I know it, and the machines know it. Silly season. Anything can happen over the next couple of weeks, but soon we will smooth out into a more definable market, whether bearish or bullish. As it stands now, the market’s indications and internals point bearish. So does sentiment, while the seasonal is bullish into February as tax loss selling season of December turns to post-tax loss buying season (“January effect”).

Much will depend on the nature of the hype as the Trump inauguration comes about. We are watching for a mother of all contrarian opportunities where just as America officially gets great again as the businessman tax cutter, regulation cutter and debt-monger (oops!) takes office the DING DING DING sound of a top is heard. That is, if a top has not already come.

But… silly season. Let’s get through it and then see if the plan for a macro pivot bearish plays out. Here I want to present the evidence behind my view but also remind you that I have been wrong before and will be wrong again. But I will follow my trusted indicators until/unless proven wrong.

Merry Christmas and Happy Holidays in whatever way you observe

I wish you a healthy, happy and satisfying time with your family and friends. That is what is important. The market will still be here when we return to business in January.

I also want to thank you so much for putting your trust in me each week. I do my best to provide a completely b/s-free product and it is much more than a job to me. It is who I am. I feel I have this stuff in my veins. I am not astute at many things in life, but in this realm I commit to being the best I can be. Thank you for coming along!

2025 is going to see my daughter Izzy join me to help me get the marketing, admin and other aspects of the operation up to snuff. Frankly, at my age I had been thinking I’d just settle into what we have here now and not worry about subscriber acquisition and conquering the world. But with Izzy and her talents, I find I am ready to re-energize and see if we cannot improve both the quality and reach of the NFTRH product. Meanwhile, I’ll have to wait until she finishes battling her way through the final stages of her short film, Immortal She. Almost there!

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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.