Stock Markets
[edit to the below] Well, best laid plans and all… several indicators were indeed included as the nerd just could not restrain himself.
Once again we make an assumption on the macro-fundamental and sentiment indicators (they remain poor for stocks and the economy) and just hop in, today with more charting (daily charts). Sort of like regular TAs do it. I don’t usually operate that way (using nominal charts only), but we have a big backlog of macro-funda already done, and during the Santa seasonal we’ll just do it the easy (and IMO, more fun) way, bearing in mind that said Santa seasonal is a lower volume holiday period, and subject to more false signals than normal.
That said, let’s review only one of several concerning indications for perma-bulls. The 10-2 yield curve steepener came from an extremely deep inversion, which means there could be some timing slush in there before the steepener begins to coincide with an overtly failing stock market and busting economy. But a negative indication it is.
SPX dropped after coming within 80 points of target. But the pattern that the target was measured off of becomes less significant as time goes on. SPX dropped hard during FOMC week and then sprang back hard to erase that. Santa brought stock investors a little good cheer. However, Friday ticked down for a thus far successful test of the 50 day average. Let’s see if the lower short-term high and that RSI divergence play out to lower prices. I am short SPY, so… I am positioned against the trend, which is up.
NDX is firmly up-trending as well. The RSI divergence could be something bearish, but it’s a movie we’ve seen all too many times. For example, such a divergence could be a refuel from overbought that springs a new surge higher. One of the options for the projected bull’s end is for an upside blow off and blow out (the other option being a slower rollover). I am short QQQ. All shorts are moderate.
We should continue to watch the Semi sector (SOX), which has re-taken a neutral view after climbing back above the moving averages. RSI and MACD are both positive and if SOX does creep bullish it could be an inkling for the rest of the market toward a “final blowoff” scenario.
We should also keep the SOX > NDX > SPX leadership chain in view. I would say SOX/NDX in particular, should be watched closely. If the downtrend remains intact, the signal would continue to be negative for the market cycle. If it were to break upward, it’s back to the drawing board for the shorts and bears… and another hint about a perhaps final upside push in the markets.
Globally, the balance of the world (ex-US) is in a precarious spot, but still intact. ACWX is on a bit of a bounce, testing resistance. The breakdown point is sub-49. Interesting stuff here.
European STOXX 600 has gone sideways for most of 2024. This could be an extended topping condition, but any bounce back above the moving averages could also paint it as a long and bullish consolidation. Right now, below the MAs the bias is negative.
Emerging Markets are grappling to hold the uptrend after declining for 3 months. A US dollar correction would very much help here. The USD is probably either about to correct or EM are about to break down.
Canada’s TSX-V index broke down from a short-term double top and is springing back to test that breakdown. All due notice that it is Santa silly season. The index is in a potential trend change from down to up and it would sure help the cause if last week’s drop to test the 200 day average ends up being the last decline. This is obviously another market that would like to see the USD fail.
USD & GSR
So speaking of USD, which is pivotal to many other markets, let’s check in. We don’t even begin to call USD a “fail” until/unless it drops below the 107 area. It’s pretty simple; if US and global stock markets are entering a real bear phase USD could strengthen with a liquidity bid. But if market indications start pointing to an upside blowoff a weak USD would probably be a feature of that. Right now, USD is bullish until proven otherwise.
Uncle Buck’s partner in the market liquidity game, the Gold/Silver ratio, remains in a pattern that looks poised for upside. It’s a pattern of a ratio and it’s silly season. So, we can be open minded as to its success or failure. The story is the same: USD & GSR up = caution in many markets. USD & GSR down = potential January party time in asset markets, including or even especially precious metals and commodities. Right now the seesaw is weighted toward “USD & GSR up”.
Precious Metals
Which leads us to gold, silver and the precious metals complex. Gold ended the week as we left it in Thursday’s NFTRH+ update. It is perched below resistance, the EMA 20 and the SMA 50. Thus, technically vulnerable. In my opinion, any drop below 2500, should it come about, would be a significant buying opportunity. I calmly hold gold through all market cycles, so I probably won’t be buying metal. But you get the point… a technical buy opp.
Silver is doing as I, someone who is short, would like (Santa silly season caveat and all), curling down from neckline resistance and the SMA 200.
However, this longer-term view reminds us that the dominant theme is bullish. In essence, we have a smaller H&S pattern projecting downside to a test of the neckline of a much larger Inverted H&S, which barely scraped our upside pattern target of 35. But that does not mean silver will not go higher after a test of support in the 25 to 26 area. If the small pattern is real, it would drive a test of that bullish breakout. We would then evaluate the prospects at that time. Right now I am not a silver bull in the interim, but remain bullish bigger picture.
GDX hinted to break down from the little bear flag we noted in the update linked above. If the breakdown is real, it increases the odds of a decline to point ‘C’, which is at the top of an area that includes thick support.
HUI weekly has broken back into the channel, as it postures to get a real gold bug stampede going. This is where TAs who over-value trend lines can get shaken out. The shaking out, of course, should have already happened. If the 240-250 area is lost we would have to reevaluate the bigger bull case. But either way, a heavy decline should spring a solid rally once support is found.
HUI monthly shows that the 240-250 area is very notable long-term support. It should hold for things to remain reasonably normal to a bigger picture bullish case.
I like looking at the log scale view of monthly HUI as well. One not so pleasant perspective it adds is that Huey could, in an extreme, decline to the lower green channel line, make a higher low and still be intact to the bigger picture bull. I don’t think that is what is in the offing, but forewarned/forearmed. You see? Such an extreme moves could fill the lower gaps on the GDX daily chart above.
A few sector internal indications, starting with the still bearish HUI/Gold (HGR) and HUI/SPX ratios. Ideally these would bottom and start positively diverging before the next sector rally. But that may not be the case, as per the March upturn, which coincided in real time with the sector rally as a whole after the HGR got croaked.
BPGDM (a measure of overbought/oversold in the gold stock sector) is on its way to getting fixed. This is the longer-term view as opposed to the one we’ve been using lately. It uses the 20 month EMA (green) to smooth out the trend, which has turned up. I would say that if BPGDM gets to the 30 (+/-) area it’d be time to pay attention from a buyer’s perspective.
We had noted a positive divergence by the Gold/RINF ratio to HUI, and Huey then bounced. But only a bounce it was, as HUI and Gold/RINF have turned back down. There is still a divergence in play, but rising inflation and inflation anxiety – contrary to popular (and incorrect) opinion – are not good for gold miners. In the best “buy signal” case, we’d love to see the Gold/RINF ratio rising while HUI declines. That is what we had early in the year before the rally began.
But gold is rising on its dominant trend vs. commodities, and that is the opposite of cyclical-inflationary signaling. It is flatlining vs. the S&P 500 (but rising vs. many sub-indexes/sectors) and moderately rising in relation to global stock markets (on balance)…
…so where is the macro inflation signaling coming from lately? I’d have to assume it is the bond market, in large part fearing Trump tariffs, debt spending and tax cuts, all of which would help drive inflationary signals within the economy.
Bond Market Indications
Before getting into more bond market indications, you can review the daddy of all bond market indicators, the state of the 10-2 and 10-3mo yield curves in this public article from December 19. Yield curve steepeners (which forecast an economic “bust”) have only furthered their way upward since it was written:
“I think it’s pretty clear we’ve avoided a recession”
With respect to inflation, I think the bond market is reacting to what it thinks it sees ahead in the new administration. But when the economy starts to show more signs of weakness (not yet pervasively evident, thanks IMO to the efforts to hold onto the White House by the Biden administration through economic stimulus and some fudged payrolls reporting), the bond market may well change its mind.
Right now the bond market is doing to the Fed what it did in 2007; forcing it to stop and reevaluate its dovish stance. Of course, that was the precursor to a “hard down” in yields, inflation, economy and stock market back in ’07.
However, if 2024 were to close today it would close with a bull flag breakout in 30yr Treasury yields. Hardly disinflationary signaling. The market is, as yet, taking the threat of Trump’s inflationary implications quite seriously. I, for one, will respect this signal until/unless it is reversed hard by a market liquidity problem and/or overtly decelerating economy.
Either way (inflationary with nominal yields rising or deflationary with nominal yields declining), steepening yield curves are a negative economic signal, even as the media and the Fed chief himself tout the “ALL CLEAR”. It’s not all clear. Not at all, unless they’ve changed the rules and moved the goalposts (always a consideration with cynically manipulative entities at the Fed, in the banking system and government in control).
Wrap Up
In support of the views presented above I hold a combination of a few long positions, fewer short positions and a boat load of cash and equivalents. I am holding the longs because I am not yet fully in the bear camp, but will release more longs and increase shorts if/as that view comes forward. On the other hand, I will release or painfully endure with the short positions if a final upside blowoff scenario starts to present. But I don’t want to be like The Big Short from 2008. The pain they took on the way to banking the crash is beyond my psychological profile.
Happy New year to you all and let’s have a great 2025, regardless of how it shakes out. I am expecting bad things for a majority, but if it goes that way we will be prepared. If it improbably goes the other way – the market remaining irrational longer than you can remain solvent way – then we will have adjusted and remained solvent and maybe even back on the speculative bandwagon, much though I personally don’t want to or expect to see that.
The market will decide, but we close 2024 expecting the decision to be bearish.
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