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When the Fed Cuts

When the Fed finally cuts interest rates in earnest, the stock market goes down (and not until). At least per the message of the last two major bear markets beginning in 2000 and 2007.

We have covered this previously with another chart that also features the 2yr Treasury yield divergence to the 3 mo. T-Bill yield, itself a proxy for the Fed Funds rate (FFR). On the current cycle the 2yr’s divergence vs. the T-bill and FFR has dragged on in its indication that the Fed will be cutting.

The reasons for the drawn out process, in my opinion, are the Biden/Yellen/Powell pre-election economic pump job that we chronicled in 2024, and the Trump tariff on/tariff off mayhem job in 2025. In other words, the market is still adjusting its sentiment crash in April as the rally drags on and Trump waxes on and off at will.

Using the 2001-2004 analog we note that the stock market declined with the beginning of the Greenspan Fed’s rate cuts while gold stocks (and gold) ended a long bear market and rose.

The stock market topped in 2007 at the dawn of the Bernanke blight (8 years of rate cutting and Zero Interest Rate Policy, ZIRP) and gold stocks at first rose but then rightly got caught up in the crash in Q4, 2008.

Why rightly? Because as I’ve harped upon many times, the miners were being driven by the inflation trades in commodities (circa 2004-2008), many of which were out-performing gold. Gold stock fundamentals were degrading and the bubble finally popped in 2008. It would be instructive to know who was and was not pimping gold stocks fundamentally in 2007, because that would indicate who is and is not a perma-promoter.

The 2020 cycle was fast and furious. The line chart does not show the extent of the damage to gold stocks and broad stocks. It was pure panic, but it was not a bear market. It was an event. As is often the case, gold stocks (and gold) rebounded first and most furiously as the new inflation cooked up by Fed and employed by government was being birthed.

But as should have happened in an inflationary macro, the overbought miners went into a long consolidation by mid-2020 (bull market down leg #2) before bottoming into the current up leg (#3). In other words, the miners did not go into a bubble this time like they did circa 2004-2008.

From 2020 through 2021 the stock market and commodities continued to benefit as the inflation took hold. Until finally Jerome “he’s always late” Powell sprang into hawkish action (well after we’d begun noting the need for such action). This excerpt from a 2022 post tells the story of a Fed that finally dropped its “transitory inflation” routine and got serious.

Indeed, Powell was late to the fight and then kept tilting at the inflationary windmill long after inflation signals began to subside (until the dramatic pre-election rate cut in 2024).

He tilts to this day, but the tilted bias is weakening. Slowly. 95% of CME traders see no cut this month and 66% have a .25% cut in September. Here let’s interject that the reason markets tend to go bearish when they get what they want (and Trump wants), a rate cut regime, is that the rate cut regime is for a reason. The reason being economic deceleration that can no longer be disregarded by even mainstream economists. They are “always late”.

Back to the chart above, I am going to lean in favor of both broad stocks and gold stocks being vulnerable when the Fed finally does cut. For the stock market and commodities that is traditional, but for gold stocks the situation is muddier. Gold mining macro-fundamentals have been eroding with the wonderful rally in risk-on and cyclical items like stocks and now, commodities. Hello Silver/Gold ratio, a current tailwind to many markets.

HUI has been rising with the anticipation of a dovish Fed, much like SPX has. That combined with the recent degradation of (but not elimination of) the positive macro backdrop, paints gold stocks as vulnerable if/when the market reacts as it traditionally does in a Fed rate cutting campaign.

Meanwhile, I continue to hold precious metals, commodity and broader stock market positions because the ending stages of a rally can be the most dynamic.

But we looked ahead to HUI’s still un-registered upside target over a year ago, and were anticipating – if not necessarily expecting – new highs in the stock market coming out of the April mini-crash, and with the Silver/Gold ratio and TSX-V as our guides, expecting the current commodity rally.

We are still on those plays. But it is time to be looking ahead, around the next macro corner. Below we look at time frames that are logical to this look-ahead to bearish outcomes that would be interim to the next inflationary operation.

Precious Metals

The timing could work out to another August high for HUI. But as you will see below, the funda, while still quite positive on the big picture, have been pulling back in the interim. In other words, on what I think are the finishing stages of now very widespread (incl. commodities) global asset market rally, gold stocks are nothing special.

Personally, favored precious metals stocks are a distinct part of my portfolios but not currently special as there is a world full of stuff joining the latter stages of the broad rally, which gold stocks had once rightly been leading (ref. the 2001-2003 analog).

Let’s look at the extent to which gold had gotten ahead of the global asset market pack as it eases in the interim relative to these markets. There are many more charts like these, but the ones below provide a good idea of what is going on with gold’s relative standing and hence, the gold miners’ macro backing.

Did Gold/SPX earn a cool down? Yes it did. We are on plan anticipating a test of the base breakout. The spike was nearly as intense as the 2020 example that came before the precious metals went into a nearly 4 year funk. I don’t expect such an outcome this time because the stock market is already at nose bleed levels. In other words, given its price and the developing economic backdrop, I expect SPX to go back to under-performing gold after this much needed adjustment plays out.

Gold/Global, overdone into correction. Normal and on the big picture still quite bullish.

Gold/US Materials sector, overdone into a healthy correction.

Gold/US Small Caps, overdone and into a healthy correction.

Gold/XVG same deal. This is gold vs. the median of 1700 US stocks.

Gold/Commodity index. The fade is all within the context of a structurally sound “real” price of gold in the new macro (IMO).

Gold/Copper, bullish, correcting.

Finally, Gold/Oil shows the situation vs. the commodity that represents the single most relevant gold mining cost input. The situation in Gold/Oil is structurally bullish for the gold mining sector. Now, we will soon be in Q2’s reporting season. Q2 pretty much went nowhere, with a slight upward bias.

This could play into a view of an August high to match the HUI chart above (this is just speculation for now). Then, if Gold/Oil continues to correct (within its larger bullish structure) perhaps that could add to corrective pressure into Q4. Again, all speculation but trying to view logical possibilities to be aware of.

Bottom Line on the Charts Above

Gold mining macro-fundamentals are very strong, big picture. But in correction with more potential interim downside in the shorter-term. Hence, fundamentally at the moment the view is “gold stocks, nothing special” (but still bullish per intact trends).

Bottom Line on the Precious Metals

• Gold led the macro as it often does. In this case it led to negative things. But as the broad sentiment profile swings back to happily (interim) bullish, gold is logically fading in relation. That is normal and it is healthy. The situation became too far extended (our long-held target was “only” 3000+, after all).
• Silver, as anticipated, has taken up leadership of late. This was a trigger to the wider “SGR trades” in commodities, rendering gold stocks as “not special” and opening up wider trading opportunities as long as silver out-performs (currently anticipating a 2nd leg up in the Silver/Gold ratio).
• As long as the SGR rallies, we’d remain bullish on the commodity complex.
• Currently targeting a nominal silver price of 40.
• Currently targeting HUI 500 (+/-), as has been the case since Huey bottomed in corrective leg #2 and then turned upward over a year ago.
• The view is then vulnerable at such time as the whole enchilada becomes vulnerable. This could be out toward Q4 as the Fed starts a rate cutting campaign amid declining economic signals and the coming of a broad bear phase or bear market. This is where it is notable that gold mining macro-funda have been easing on an interim basis.
• Bigger picture, this would be the next major buying opportunity, given the structurally strong longer-term macro-fundamentals.

US Stock Market

With Trump making tariff noise again, let’s note that the ES (SPX futures) was down .64% on July 4th, in line with global indexes such as Germany’s DAX (-.61%) and others.

But the situation closed Thursday at an overbought new high and was due for some kind of reaction. One Trumpian jawbone comin’ up! So maybe we’ll actually get a gap fill. Humorously, the holiday shortened session on Thursday left a little one. It remains to be seen whether SPX could make such a dramatic move to fill the gap at 6028 (that’s sarcasm). The point being, if this is a last chance power drive to termination this pig may have no inclination to fill downside gaps before reaching its goal.

Separately, I’d continue to give weight to the April lower low as a scout for a future bear market.

A declining Equal Weight SPX does not matter!

Until it matters. Sort of like sentiment, a downtrending RSP/SPY ratio is not a timer, but it is a condition for a top in the S&P 500. That condition is in place with this indication of waning market breadth.

But in the here and now, the SOX > NDX > SPX leadership chain is still on its interim bull signal.

As for timing, the Fed is predicted (all due caveats about CME prognosticators) to begin cutting in September. So, given the stock market’s penchant for going bearish after a rate cut campaign begins, let’s think about the probability of a tough late Q3 to Q4 for stocks. We just started Q3.

I hold stock market positions, but I am aware that if the analysis is correct I am playing a game of Risk.

US Stock Market Sentiment

Speaking of risk, the sentiment backdrop says it all. One thing it is saying is that Friday’s pullback in the ES was in the cards as dumb money was eating itself some stonks and smart money was fading. Those risk summaries tell a contrary bearish story about a developing condition for a top.

Fear/Greed index… doink! Extreme greed.

AAII (individual investors) jerked bullish last week, even before Thursday’s gap up. It’s a danger signal, but probably not extreme yet.

NAAIM (investment managers) jerked nearly 100% bullish before the Thursday gap up.

US Sentiment Bottom Line

Over-bullish to extremes and a “condition” in place for a significant market top.

Global Stock Markets

Global markets will be unlikely to buck the bearish trend when the US tops out. In fact, the ACWX/SPY ratio just ticked that lower low we were on watch for. May be nothing, may be an important something. Whatever it is, the series of higher highs/lows in general global stocks vs. US stocks was broken.

While nominal ACWX continues a gappy rise of its own. As with SPX, there is a bear market sentinel down there below 49.

Bottom Line

When risk is realized in markets, it is highly unlikely that global stocks in general will provide any shelter from the storm.

Commodities

Let’s begin with the global index most relevant to commodities (despite component rebalancing over the years). The TSX-V index is bullish and seeking our next target at the 800-850 resistance range.

It is also still firmly trending up vs. the senior TSX, which we anticipated on the previous drop to the SMA 50 (a trend is a trend until it is broken). The Silver/Gold ratio is still trying to get on a similar program, but importantly, is still trending down.

With TSX-V/TSX at a new high point in its stair-step rally either there will be a pullback shortly or the trend will accelerate higher. Both scenarios are valid, in my opinion.

Meanwhile, if TSX-V goes to 800-850 “why might not the CRB index go to 385?” asks the weekly chart.

The base on the chart above looks set up for such a move. But our favored scenario would have bullish commodities meet their at least temporary end when broad stocks and gold stocks do. Our model is the 2006-2008 situation per the monthly chart. Up cycle, down cycle/consolidation and up cycle into blowout termination. Then, if past is prologue, crash.

Of course, past may not be prologue in a new macro with new long-term inflationary signaling from the bond market. So please take the above with a big chunk of salt. Right now it’s an operating plan that is short-term bullish. Beyond that we may have to refine/revise because the projection of a broad crash is just speculation based on the history of a different macro, at this point.

Macro, Commodities and the Broad Play

• Logical view is that the Silver/Gold ratio (SGR) is on a temporary spike higher.
• I believe this signals the final phase of the inflation that was born in 2020.
• Meanwhile, in the here and now the SGR is a nice tailwind for commodities, especially, and precious metals (and stocks to a lesser degree).
• We are in a new age of long-term inflationary macro signaling by the bond market.
• But first, a liquidation of markets – whether mini, maxi or something in between, which would be the trigger before…
• The next inflation cycle, as Fed and government conspire to blow another inflationary gasket.
• Except this time, with the bond market in rebellion (and a bear market) the mechanics of the next inflation will be compromised compared to what we experienced from 2001 to 2022.
• Stagflation most likely, Hyperinflation possibly.
• But again, my theory is that first we have to complete the current inflation cycle, then liquidate it, then inflate again.
• Fun stuff, eh?

Meanwhile, I am still positioned and adding items here and there. For example, picking up more Nickel prospect TLOFF (TLO.TO) on pullbacks with geologist MC as my fundamental guide. Added Palladium on Thursday’s pullback. Holding Copper miners. Holding Energy. Holding Uranium, etc.

I am also looking to buy back US Rare Earths producer MP if/as the flag pulls back to the 29 area.

Aussie REE LYSDY was already added back, currently nesting on the SMA 50.

In short, I am keeping an eye on the Silver/Gold ratio and the TSX-V/TSX ratio along with CRB (GNX, DBC) for signs of an upward break of the long consolidation. That would signal the final leg of the current phase if it plays out. Of course, if these items fail sooner then the play fails sooner. But right now the short/intermediate-term trends favor upside.

US Dollar/Currencies vs. Gold

Which leaves us with the world’s fading reserve currency. The Trump administration can think whatever it wants about what it is doing. But the effects of what it is doing are beyond the Trillions in debt increases we will continue to saddle younger generations with. These effects include a compromise of the currency. The oldest trick in the book for Banana Republics far and wide, devaluation.

Trump, the leader of a supposedly once (monetarily) responsible Republican party, is pursuing a dollar devaluation policy, driving up prices and giving the appearance of bullish asset markets.

If the liquidation scenario outlined above follows the current inflation cycle, USD will likely get its next major rally. However, the daily chart is currently just plain bearish as DXY is locked in a downtrend below the 50 day average.

The bigger picture shows that if the SGR trades continue in the near-term USD would probably decline to the 93 area, at least, if not the 89 area. Interestingly, neither of those levels would kill the buck’s bull market. Trump may be killing it, but technically speaking that would not be confirmed unless 89.20 is lost.

USD Bottom Line

• Expected to decline as long as the current inflation cycle and SGR trades continue.
• Expected to gain a liquidity bid when risk goes off after the cycle ends.

Meanwhile, I found this chart interesting as some global currencies start to make counter-trend moves relative to gold. If that continues, for example, potentially to the downtrending 200 day averages (as per the EURUSD/Gold top panel) it would be a strong rhyme with gold’s continued pullback within its big picture positive standing in the “new macro”.

In other words, macro relief happening now before a return to macro pain later.

Gold is fine.

Portfolio

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

Taxable Account

In order of position size. I am looking at certain items for inclusion or elimination as the market rotates into and away from certain segments. For example, I am suspect of global stocks now and BABA has not done squat. However, it has not lost its Symmetrical Triangle, so I am day to day (individual technicals play a role too).

I intend to hold favored gold stocks as long as I think HUI 500 is still in play.

A stock like CRSP sneaked up on me with its 25% gain. Looking at the chart, it has bounced within its downtrend to an overbought lower high. So I’ll consider selling. Got a couple bull stock dinosaurs and a couple AI plays along with “SGR trades” in commodity related items. Oh, and lot’s of cash/equiv.

And then there are TLOFF (TLO.TO) and AMEGF (AE.V), which I’d love to see through to a rich payday one day. If I keep levering into them they will either boom or bust. It’s how metal exploration stories roll. I guess a plan could be to bulk up further and then when I feel the commodity trades are at imminent risk, take partial profits on (if they exist) on them. Geologist MC is very high on TLO, as previously reported, and positive on AE. But again… hole drillers and all the complexities that come with them.

The taxable account carries very high cash levels as long as cash and equivalents are paying out. This is considered a savings account of sorts, rather than a speculation or even investment vehicle. The goal is to speculate around the periphery of that. In another market phase (e.g. post-crash), the account may get much more in the game.

Trading Account

No positions. This is where I’d like to nimbly short individual equities when I start to feel the broad rally is concluding.

Roth IRA (non-taxable, no contributions)

The chart is solidly on a new leg up after a drawn out phase of going nowhere. I continue to balance the need to retain profits with the wish to gain more of them. Hence, I am letting a little greed creep in due to the knowledge that the dumbest money comes in toward the end of trends and often drives the finishing momentum. Ref. silver in spring, 2011. Nasdaq in 2000. Oil (at the behest of the Peak Oilers) in 2008.

Cash/equiv. is at 75%. About right for now. As noted above, TLO and AE are feature speculations. You’ve got some bull stonks in there and remaining gold stocks. REE, Uranium, Copper and Energy. Combined with the Tech oriented bull stocks, it’s fairly well balanced. That balance has really helped keep the chart above elevated at such times that gold stocks have taken a hit lately.

As per the analysis, I am week-to-week, evaluating the potential for a late Q3 into Q4 end date of the broad rally (and fully aware we are in Q3). Of course, “potential” means just that. If the party were to drag on it would not be the first time I’ve missed on timing.

Again, week-to-week with b/s detector in hand and eyes on indicators from macro to sentiment.

Cash & income-generating 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.