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Summary

US Stock Market: To the surprise of no one, SPX bounced to negate the small H&S pattern’s neckline. The decision point is the right shoulder. See US Stock Market segment below. SOX > NDX > SPX leadership has not nearly recovered a healthy status, but it is still working on that.

US Market Sentiment: Structurally over-bullish, as has been the case. But last week sentiment indicators reset to a degree that would be amenable to a new stock market surge. But we are also in the macro time zone now where a big contrarian bear play could erupt. Hence, technical decision points should be respected until short-term evidence points one way or the other.

Global Stock Markets: Still generally under-performing the US, as the strong USD applies the pressure. Obviously, if USD breaks down and stocks in general remain bullish, a favored view toward global markets would come forward. That is far from the case as yet.

Precious Metals: Sector sitting at similar decision points to broad markets, with a handy and emotional political event set to take place tomorrow. The view is that if the broad markets take another leg up, so too will the precious metals, because of their more often than not positive correlation. Bigger picture, the sector is not yet unique because the fundamentals will depend on a confirmed top in stocks and further economic deceleration.

Commodities: Decision point. Watch silver. Watch silver’s performance vs. gold. Watch USD. If silver outperforms and USD weakens, let’s get ready to party. That has not happened yet.

Bonds: Treasury yields pulled back last week with the “just right” Goldilocks signals on inflation. However, short-term Treasury fund SHY looks pretty darn positive. Let’s put it this way, I am content with my cash equivalents in SHY, SGOV and direct short-term bonds. along with interest bearing (MM) cash (with an eye toward shifting more toward Treasury MM). With yield curves steepening, the right choice continues to be the short end of the curve. If this disinflationary whiff takes hold, you know the bulls… they could spin Goldilocks into a “next leg up” joy fest in stocks before an eventual liquidity crisis.

US Dollar Index: Right now, our main concern is USD, which is still the reserve currency, despite magical thinking by Team De-Dollarization. USD is in base breakout mode.

Indicators:

• Gold/Silver ratio still not confirming USD to the degree that would cause severe market problems.
• Yield curves are clearly steepening and should resolve badly for markets in time.
• Fed liquidity draining, while stonks continue upward. Bad combination…
• …unless somehow the fiscal side (Trump/government) manage to shove enough stimulus through. That job would clearly be more difficult if Treasury yields remain highly elevated.
• A dangerous correlation to 2007 remains in play in the bond market. See next segment.
• VIX: asleep. High Yield spreads: asleep. Other non-forward looking indicators: asleep. One day, it’ll be “wakey wakey little indicators”… but not today. Not yet.

Contrarian Pivot?

We have arrived at US Presidential Inauguration day. Depending on how you view him, a successful businessman, reality TeeVee star, narcissist, American nationalist, criminal, well intentioned “America first” advocate, or chronic shit disturber is taking office tomorrow. It’s going to be an interesting 4 years. Much more interesting, in my opinion, than had his opponent won the election and maintained the status quo.

That calls us, as market participants, to attention. We need to be ready for something very different than the last 4 years. The common wisdom is that Republicans are more business friendly than Democrats. That Republicans are less regulatory. That Republicans are more tax friendly. That Republicans are more pro-America. Well, Trump is all of those things, on steroids (and so much more).

As a participant who is beyond caring anymore about who is in office (because, it seems, we as a society have devolved to a point where we get the candidates we deserve), I only want to know how this period in time is going to resolve, market-wise. Well, that’s my job, anyway. It certainly is not my job to offer political beliefs, especially when they would be quite depressing, if offered.

So, it is on to market management; my comfort zone. I’d like to start off with another graphic, courtesy of Michael Pollaro. The price of the stock market (S&P 500) vs. Fed liquidity, post-financial crisis, is a compelling view of stock market expectations out of whack by yet another indicator (as if we needed more of them).

Something has driven stocks well beyond their usual benefactor, which has been liquidity manufactured by the Fed’s monetary policies. That policy is rightly in downward consolidation from nosebleed levels registered in 2020. Yet stocks continue to climb.

What is driving this? Options are…

• Anticipation of beneficial tax policy, de-regulatory policy, the hope that tariffs are going to shake out as a net positive for US corporations.
• The idea that Trump will be able to increase the fiscal bag of debt, unabated, as he wishes. In other words, that unfettered government fiscal policy will continue and even accelerate while the Fed continues to QT and hold relatively firm on the Funds Rate.
• The idea that Trump will be able to easily cheapen the US dollar, as stated. This option is, IMO, doable, given the debt situation and his stated goals for more of it.
• A post-hubris society believing in magic:

1. Believing that debt can simply be rolled over again and again, to new stratospheric heights, to the benefit of the economy (they will try to roll it over indefinitely, but it is the “to the benefit of the economy” that is in serious question).
2. That steepening yield curves, proven indicators of the “bust” side of the boom/bust continuum (curve flatteners have been proven to be the opposite, running with a “boom”) no longer matter.
3. That market valuations, near historically high levels, no longer matter (because “America great again”?).
4. That extreme insider selling no longer matters.
5. That the situation in 2007, when inflationary pressure interrupted the Fed’s rate “pause” regime, with the bond market demanding tightening policy, preceding an epic bear market, will not play out this time.

Bottom Line

As always, we note that anything is possible in Wonderland. I have taken pains over the last many years to make sure I do not get overly influenced by my inherently negative views about how the system in general is run. I have taken pains to call “bullish” when my indications say so. Right now, while mainly in cash and equivalents and long some equities (with a token short on SPY), I am calling bearish because the indicators say so.

Timing is always an issue, however. That is why I find this point in “time” fascinating. America = great again. Trump ascends once again. Businessman, de-regulator, tax cutter, tariff imposer. It’s all good! Now, even assuming some of that is true, is there not scope for the stock market to have discounted it all? I say yes. I also see a wonderful contrarian potential here.

Our view all through 2024 was in essence that the Biden administration (with the 2-faced Yellen in a side car) was pulling out all the stops to keep things liquid and keep Trump out. Well, he is in. But he inherits a well pumped stock market (T1) and economy (T2). Thing 1 is burdened by the indications noted above. Thing 2 is slowly decelerating, even as Trump prepares his brands of stimulus.

But the bottom line is, we are at a potential pivot point (not necessarily on Tuesday, but generally over the coming weeks) to a hard correction at best and a bear market at worst. “Potential”… I don’t make predictions. Meanwhile, the stock market’s trends are up and that’s not nothing. It is very much something.

US Stock Market

And so here we sit, at a slight lower high to the right shoulder of the small bearish pattern. Take out that shoulder to the upside and we’re probably on the next intense “America great again” (AGA) power drive (don’t discount the power of speculative momentum and bullish sentiment). Hold below it, and we’ll look for the 200 day moving average as the first – and potentially main – objective. Technically, it is not time to be talking bear market yet.

NDX is two things: 1) in a short-term downtrend and 2) in a potential bull flag. Much as a bullish SPX would have the right shoulder as its pivot point, NDX has the top of its downtrend channel/flag.

The Semiconductor index would eyeball the upper gap at 5715 if its posture above the moving averages holds and the AGA rally comes about. At some point, during the next bear market it will probably see to those lower gaps.

The SOX > NDX > SPX leadership chain is still constructive to recover, although we should also realize that SOX/NDX and SOX/SPX are still in intermediate downtrends and NDX/SPX is merely going sideways. So as yet this is far from any sort of compelling bullish internal. But we’ll keep watch on it, in the event that it does continue its short-term swing toward positive.

US Market Sentiment

And they’re off! Here comes the recovery in dumb money sentiment, right on cue (of the AGA/inauguration). The Smart/Dumb data are very short-term. Dumb probably ate a big chunk on Friday’s bullish day.

NAAIM (investment managers) had started to bounce from 65% bullish to 70% bullish as of the 15th. After that the market continued to rebound, so they are more bullish now.

Investors Intelligence (newsletters) took a massive spike down in sentiment, from a bull/bear ratio near 4 to 1.32 on January 14th. This is a contrarian positive, sentiment-wise.

AAII (Ma & Pa) also took a hard spike down, from a bull/bear ratio of 1.6 to .6, after topping out at 2.4 in mid-2024.

Sentiment Bottom Line

If the play is for another up-surge in stocks, market sentiment is saying “have at it!” from a contrarian perspective.

Global Stock Markets

As usual, the trend of global stocks vs. US stocks is generally following the inverse trend of the US dollar. This is nothing new, but worth an updated view once in a while. This is a visual explanation of why I have not favored global stocks.

ACWX did bounce back into the trend channel and is testing the moving average convergence (and death cross, fwiw), in a display of just how frustrating it can be for those who chase breakouts to the upside or down.

US Dollar & Gold/Silver Ratio

You know, it can seem interminable; the time in between actionable signals. But so be it. That is the market we have. At some point the Gold/Silver ratio is either going to break above the key level of 90-92 and join USD in a bearish indication for markets, or it is going to continue to flounder, possibly previewing a failure by USD.

Those forecasting bearish for USD are not using charts. The charts are bullish on daily, weekly and monthly time frames. They must be extrapolating Trump, BRICS “dedollarization” and/or other macro fundamental views.

The 2 (would-be) Horsemen of Liquidity Apocalypse are still in non-confirmation mode.

Precious Metals

Hence, it is important to keep silver front and center, both as an indicator and a potential investment vehicle, should the Gold/Silver ratio remain muted or weaken and USD fail its breakout.

Last week silver held support, took out the SMA 50 and the wedge top and on Friday pulled back to begin a test of that breakout. Why, of course it did! We need to dial up more patience. But it appears that very soon we will know if silver will go bullish, post-inauguration or is going to fail. Personally, I am not going guess. I am going to go with whatever becomes of the decision point in play for silver (and stocks, for that matter).

Gold did indeed pop to resistance after breaking out of the nose of the symmetrical triangle. We will find out soon enough whether the 3rd time attacking resistance will have weakened it enough for it to give way. If so, we are on the 3000+ Express, in my opinion. If not, there could be another test of the SMA 50 (2642) and the nose of the triangle. A failure to breakout would also have us aware of the uptrending SMA 200 in the low 2500s.

Another market/ETF at a decision point. GDX gapped up after a quick loss of support and is now nesting on top of the moving average convergence, which is also death crossing. You know my views on that. Those that see, take seriously and position for a “DEATH CROSS!” could be punished by a hard bounce at least, at some point post-cross.

Precious Metals Bottom Line

We have been noting that most of the sentiment and momentum excesses have been addressed and the sector is effectively cleaned out. While internals like the BPGDM (Bullish Percent Index) and gold’s relationship to inflation expectations are much improved, they are not extremely positive. But they don’t necessarily need to be. HUI/Gold and HUI/SPX ratios are still very depressed. That means gold stocks are a value in those terms, but not giving a positive divergence, which may not happen, as these ratios often drop hard and simply reverse, ‘V’ style.

Given the mostly positive correlation between the precious metals and the stock market over the last year, I would expect that a new up-surge in stocks would also see a new up-surge in the PM complex. Again, watch silver. Of course, if stocks take a contrarian hit after AGA, I’d expect the PMs to do so also.

As with other markets, a decision point is at hand.

NOTE: I am doing some linear thinking in projecting a still-positive rough correlation between stocks and precious metals. But let’s be aware that while Trump is a lot of other things, he’s also a wild card. So let’s avoid robotic thinking and keep our minds open. It is, IMO, almost demanded by the current macro.

Commodities

The daily chart of the Commodity ETF, DBC is extended to overbought on the recent spike. It currently resides below lateral resistance.

The weekly chart appears quite capable of busting bullish, however, should the macro become favorable for the inflation trades. That would involve silver rising and outperforming gold, and a correction in USD. I am staying open minded about commodities as a whole.

Hence, some Uranium exposure was taken last week in the form of URNM and NXE, neither of which have bullish charts, but maybe the harsh pullback has been enough to give it a go. These are in addition to currently held Energy stocks AR, XOM and CVX. Also, in the outlier commodity patch, Lithium play LAC is held.

I am trying to resist biting on US Rare Earth producer MP, but that resistance may not last much longer.

Platinum and Palladium are still in “going nowhere” mode. Copper is neutral with a positive bias and the copper miners are also going nowhere. It will be interesting to see what copper miner FCX does at the neckline of this Head & Shoulder pattern that everyone sees…

…because the longer-term view is of a hold of clear support. An invalidation of that H&S would, in my opinion, signal a significant rally to come. I would consider getting long for that, if applicable. Obviously, a failure of support could be very bearish. Again we have another item to let show its hand before commitment.

Bottom Line

Watch silver, watch its relationship to gold and watch USD. If silver outperforms and USD weakens, we could yet have an inflation trade on our hands. If things go the other way, as you were.

Portfolio

Gold is long-term risk management & monetary value/stability in a balanced portfolio.

Taxable Account

In order of position size.

Mainly cash/equiv, accepting monthly income. Equities are a fairly diverse mix of items. Account is biding its time.

Trading Account

Short SPY

Roth IRA (non-taxable, no contributions)

Talk about a decision point! This thing is right in the nose of a Symmetrical Triangle and will break out one way or the other before long. A Sym-Tri is a “continuation” pattern, so I’ll hope the IRA’s manager knows what he’s doing and is doing enough to break it upward. :-)

Cash/Equiv. is 84%, having leaned a bit back into long exposure. Decision points ahead across many/most markets.

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.