No Confidence
At some point the shine is going to come off the story that sees Trump as a great negotiator, artful dealer who’s whipping the rest of the world into shape with respect to America’s standing on trade (which, as a former manufacturing person, I agree with in theory). But there is a thing markets depend on besides economic and financial conditions. It’s called confidence.
Does this inspire confidence among anyone? Beuller?
The president’s weak minded action, not to mention the report itself do not inspire any confidence.
Looking into the disastrous July Payrolls report, after two previous reports that were pumped in Trump’s favor were revised down, we find a sad state of affairs in the job market. We find the president of the United States still blaming his senile predecessor, whereas you know he’d claim full credit had the reports been stellar. No confidence.
Let’s take a short-term view, as we are only now at the dawn of the tariff-altered economy, the Trump economy. Longer-term, things will probably shake out differently, but we are managing a market decline (that left “lower low” bear markers in April), a hopeful rebound in casino patrons’ spirits and now, the prospect of an interim correction to the next inflationary up cycle (at best) or a decline that takes out the “lower low” markers for a heavy cyclical bear market (at worst).
Government is shrinking as it should. But so too is manufacturing. All that’s left of the former mighty consumer/services economy is Education and Health, much of which is embedded and not subject to recessions. Also, check out Leisure & Hospitality. It’s barely a blip at peak vacation season. The economy is on track to our anticipated plan for recession.
Manufacturing is an economic leader, even as it has been shrunk for decades after politicians took the easy way out and exported “dirty” jobs to places deemed worthy of such work (at fractions of the cost of production in America). America was a powerhouse of industry from the war to the 1970s. Then came trickle down economics (Regan, Bush1) and then outright sale of our industrial base down the river (Clinton, Bush2), before stabilization (Obama, Trump, Biden).
Here is the latest Manufacturing PMI from ISM. Note that not only is it in contraction, but prices are declining. A little context here. Price have been exorbitant, I assume with the coming of tariffs. We have an overall PMI solidly contracting and so too are prices. All the way down to 64.8 from 69.7! Again, compare that with an overall report with all components at 48.
In other words, prices, while contracting, are the only component of the overall report holding the PMI up at a paltry 48%. Prices! I expect prices to continue declining, however.
This fits with our theme that regardless of any future inflation phase out on the horizon, we’re likely to see economic deceleration and recession along with liquidity problems in the markets (and potential bear market). Not a good picture, folks.
Look here, the Good Ship Lollipop’s consumption engine is starting to wheeze and grind.
On Friday’s weak employment data, the bond market finally responded in a way that seemed to vote for recession and against a new inflation cycle (for now). This is our “interim” view, assuming it continues to play out. Despite a perhaps passive aggressive Jerome Powell stating that tariff-induced inflation was still an issue on Wednesday…
“Higher tariffs have begun to show through more clearly to prices of some goods, but their overall effects on economic activity and inflation remain to be seen,” Powell told reporters in a news conference following the meeting. “A reasonable base case is that the effects on inflation could be short-lived—reflecting a one-time shift in the price level. But it is also possible that the inflationary effects could instead be more persistent, and that is a risk to be assessed and managed.”
Gotta love this guy, standing up to Trump like that. But the cuts are very likely coming, as the bond market exclaimed on Friday. The bond market’s inflation expectations gauge took a hit.
The 1-3yr Treasury bond fund took a pop. *
* Oh how successful short-term Treasury holdings (either direct or through funds like SHY) have been since they were added as “cash equivalents” in the heights of inflationary hysteria.
The 10yr Treasury yield got hammered on the weak data.
And the daddy of our bond indicators, the 30yr Treasury yield, is deciding whether or not to double-top. I think it is. The “interim” play envisioned is and has been for a drop in Treasury yields per economic weakness and fading inflation fears. But this drop would not come close to the drastic levels (1%, 2%, etc.) it did at times of stress when the downtrending “Continuum” was intact for decades. Now we would look for the former limiting moving averages (red) to act as support for the new uptrend in long-term yields.
As a side and personal note, we sold our house at a bubble price a year ago (we were so done with small country town living) with a plan to rent for 1-2 years and wait for the economic and bond market adjustment as illustrated above. At which point we would buy a smaller home in a place we enjoy. So I am talking my book because I have put our money where my plan is and I see nothing above that indicates the plan is not engaging. We are just starting our second year in the apartment (which we love) and I believe we’ll need to be ready to jump on a house, or possibly condo, within the next 6 months.
It’s only a day, but the market voted hard that it did not expect the lame jobs report, nor the revisions to the previous two months. The economy is as we’ve been saying, softening and decelerating.
Trump-o-nomics, no matter how successful it may be ultimately (I have at least 60% doubt it will be anything other than a debt-fueled inflationary disaster), will not stop the oncoming recession. Biden/Yellen/Powell delayed it pre-election, and Trump is doing whatever he is doing to the economy. But the recession, the bust cycle, was coded in already.
Take a moment to think about how the Ministry of Information (Fox) was trotted out to loudly proclaim “there is no recession”, “tariffs have worked”… I actually saw a gaggle of disinformers on Fox laughing and taunting about it and thought “ruh roh, here comes da recession”. As you know I had previously taken Art Laffer’s gushing interview (interviewer’s name escapes me) about prosperity as far as the eye can see the same way.
Market Cracks, Rotations in Play? Bear in Play?
SPX got cracked hard, through very short-term support. It should drop to test the 50 day moving average and associated support at the February highs, at least. Also, it would be a nice time for a classic post-Golden Cross (SMA 50 above SMA 200) tank job in the southerly direction. * I think it is time for a decent, if not serious, correction. Perhaps down to the 5700s.
But this market has earned a full on bear as well, if that is in the cards. If that were the case we’d look below the April low to at least those gaps from 2023. But that is getting way ahead of ourselves. In the here and now I do not want to short a one day crack. I’ll consider shorting a setup if one manifests.
* A reminder that Golden Crosses and Death Crosses have an uncanny record of making hard moves in the opposite direction as implied. It’s like a sick joke that keeps getting promoted by casual TAs (and those with agendas).
By way of an example, Hammer and I were discussing ISRG. I have no position, but an optimal short setup was on the upside test and failure at the converged moving averages (red arrow). Another setup came with a short-term rising channel (bear flag), that broke down.
I had a busy week outside of markets so was not really engaged. But going forward, setups like that can be scouted in individual stocks and/or indexes. I am tempted to just short SPY and not look at it. But to this point – since before the market cracked – my tack has been to sell bull stocks before thinking about shorting. Profits booked, and all.
Meanwhile, there are areas that may do well relative to others. For this reason, I held my XLRE in case they pump Real Estate (REITs) as a rate rotation play. But I am not going to tolerate a loss of the moving averages. I added XLRE for its pattern and for the prospect of declining yields. We’ll see.
In a related matter, the Homies were positive on Friday, as the machines apparently were programmed to rotate there on dropping interest rates. But as I recall, subscriber DT, a Homie himself, forecast a bad Q3 for the home builders. Q3’s results, to be released in Q4, could be a good opportunity to profit from the short side, assuming the sector keeps rising with the declining yields play in the short-term.
The counter-cyclical winds and the resulting tamping down of yields are a tailwind for the gold stock sector as well. The HUI/SPX ratio looks poised to end its consolidation while never having lost its daily chart uptrend.
Meanwhile, the Semiconductor index has led the market relief rally, and completed its objective by the filling the gap. It is now dropping to test the SMA 50 and support with a gap just below 5300. If we go real bear we note the gaps that are lower. But first things first, eh?
For now, the SOX > NDX > SPX leadership chain is intact. Should SOX/NDX and SOX/SPX continue to roll over we can embolden on a stronger bear phase.
U.S. Market Sentiment
The rally in the stock market was all about bringing back the herds that fled in April. Back then, sentiment was way WAY over-bearish. Today it is just taking its first ding since becoming briskly, borderline extremely over-bullish.
- Dumb & Smart Money have begun to turn away from their extremes as of Friday.
- CNN’s Fear/Greed index pulled back to neutral.
- NAAIM faded to 76% bullish (before the hard down day).
- AAII remained in its mildly over-bullish stance before the hard down.
Being a sentiment recovery rally from the near-terror of April, sentiment did not need to read massively “bull killer” over-bullish to cause the market to spring a leak. If a big correction or bear market is in the offing, sentiment is not standing in the way.
Precious Metals
What do we always note about gold stocks? They are counter-cyclical in their best suit. With the Silver/Gold ratio and “SGR trades” and stock markets running, so too can the gold stocks. But the best environment for gold stocks as a unique sector is a counter-cyclical, disinflationary one. That is what I believe is unfolding. The Gold/Copper ratios believes it too.
I do believe we are concluding the healthy corrections in gold’s ratios to other more cyclical markets. However, other items would need to follow Au/Cu upward to confirm that many measures of gold’s “real” price were exiting correction.
Indeed, the Gold/Silver ratio above has not even turned up decisively yet, so we can flip it over and view the Silver/Gold ratio along with its running mate, the TSX-V/TSX ratio and call the “SGR trades” not dead yet. Both got clocked at the end of the week, but both are still trending up on an intermediate basis.
It is usually good for gold stock prices for both of these ratios to be rising, but it is not necessarily better for gold stock fundamentals. Although, I think that will take care of itself if/as economic weakening continues.
If the economy and the inflation that fueled it on the previous up cycle truly are fading, the Gold/RINF ratio will rise, which means a proper gold mining macro-fundamental will also rise. NFTRH is the shop that tells you cyclical inflation is bad for gold mining. It does not pump you about inflation being good for gold stocks. That is left for the, well, pumpers.
Gold/RINF merely had a pop on the poor jobs report as the bond market signaled anti-inflation. Follow through is needed to be able to call this guide for HUI in place for higher prices.
Meanwhile, if Gold/Stock Market has not yet finished its much needed and healthy correction, it sure appears close.
And no, despite the hysterical upside in gold’s nominal and relative prices in the spring, there’s no bubble here. There is just a base preparing for more upside in gold vs. stocks. Potentially much more of it.
GDX (daily) filled a nagging gap on the downside last week. The chart is ready to end the correction if Friday’s little pop amid pain elsewhere is an indication. However, improving fundamentals or not, the market will do what it will do in the short-term. Thus far, GDX has held the SMA 50 after filling said nagging gap.
In the event the miners get caught up in market troubles, another nag resides just above 46. I don’t think it likely to fill any time soon, but open minds folks. Our tolerance has been not to break the support at/above 50. So far, so good (and with an improving macro to boot).
Back to the prettiest picture I have of gold stocks, the monthly chart of HUI. The chart wonders if another August high is in the offing. It’s possible, as the daily chart above implies fuel built up as the sector has consolidated from overbought conditions.
The operating target has been 500 (+/-) for over a year now, and Huey has come fairly close to it. But if the macro swings away from this ‘Trump’s gonna fix the economy’ (short-term) bullshit*, HUI could shear right through target to new all-time highs for all I know. This is where week-to-week, month-to-month management comes in. The future is wide open with possibilities.
* Cue the Ministry of Information, AKA Fox News, and Art “no laffing matter” Laffer.
A Few (daily) Gold Stock Charts
As noted in the Weekly Notes, I added a second RIOFF (RIO.V) position on its drop to the projected buy area. It is still testing that support area.
Before that, the same was done with NGD. These are two favored items I had taken profits on in one of two positions. Now back to two positions each. If the correction is not over, NGD has another gap at 3.79 and a support area.
I chased the permit hype* on MAIFF (MAI.V) to start a position, but it is still in its bull flag and assuming I want to continue having interest, would like to add on further pullback toward the SMA 50.
*On another miner’s permit, no less.
Large profit was taken on a partial SKE position. I would consider buying those shares back on a gap fill at 12.70.
As for gold and silver daily technicals, reference Thursday’s NFTRH+ update.
Gold popped on Friday, closing above the 50 day moving average and poking the broken lower triangle line. Upside follow-through would paint the breakdown as a shakeout.
Silver continued its downside test of the 50 day average. I started a position in PSLV. It’s better to buy silver at 36 than 39. They taught me that in Market Genius school. A hold here is needed, just as upside follow-through is needed for gold.
USD was also included in the update. We’ll review in the Currencies segment below.
Let’s end the segment with a chart advising how bullish it has tended be historically when the Fed cuts rates. Powell is still tilting at his windmill, perhaps to poke the bully Trump in the eye. But market signals are gathering for just that, rate cuts.
Commodities
I have released a lot of “SGR trades” in commodity related stocks. That includes Copper miners, Uranium stocks and Energy. It also includes the PGMs, although both Palladium and Platinum are on watch.
With the duo of the TSX-V/TSX ratio and the Silver/Gold ratio still intact, I still hold REE items MP (in part so as not to incur the cap gain tax) and LYSDY, and have a very close eye on IDR, free falling into a potential buy opportunity at around 14 to 14.50. A heavy profit was booked, but with the intention of bringing it back if a correction would hit the stock. Well, it hit.
This is an example of a buy setup, much like the short setup example for ISRG above. There are many more out there.
I’ll tend to want to stay with the strategic commodities like REE and to lesser degrees Uranium, PGM, Copper and even Nickel. Commodities that will be key to future industries. Later, when the next big inflation phase manifests, the wider commodity spectrum could bull.
As it stands, we are still waiting for the CRB index to either fail now or bust upward to target. The question is whether that is a bear flag to a double top or a pattern with a measurement to 385. Eyes on TSX-V/TSX and Silver/Gold daily charts for short-term indications.
Currencies
I noticed that global currencies may be resuming downtrends in relation to gold. This fits well with the ongoing major bull market in gold.
Meanwhile, the linchpin, USD, got slammed on the weak U.S. employment numbers and the weakening Fed those numbers implied. It’s pretty uncanny how USD doinked our next resistance objective perfectly before dropping. That may be all there was to the rally off the pattern.
But Uncle Buck has one more potential trick up his sleeve. That would be the “liquidity bid” trick. If broad markets were to liquidate, much of that liquidity would buy US dollars. It would be forced to.
Otherwise, the trends are intact: Trend 1 is the Trump administration’s active measures to devalue the dollar. Trend 2 is the technical one. USD only breaks its downtrend with a take-out and hold above 102.
As for the Friday smack down, USD is at short-term support at/above the SMA 50.
Portfolio
Gold is long-term risk management & monetary value/stability in a balanced portfolio.
Taxable Account
In order of position size. I’ve cut back, taking profits and limiting losses before Friday’s market crack. The exception being the Euro short, which was sold at a small loss on Friday as USD tanked. The goal now is patience and perspective. Much like with selling our house, going cash/sidelines waiting to redeploy, the same can be said for stocks.
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. But it is time to start looking for short setups on individual names like the ISRG example in the report above.
Roth IRA (non-taxable, no contributions)
The chart is okay. My intention is to keep it okay. Not to further its upside at this time.
Cash & Equivalents are at 86%. There are excess “bull stock” stock positions that will likely be converted to more cash if the market continues to correct. Those would be ZS, CRSP and OKTA. There is still some minor commodity/resource exposure and some basket items. No current plans to sell remaining basket items.
No current plans to sell gold stocks. Possible plans to increase holdings or hedge them, depending on the market (ref. GDX TA earlier in the report). Right now, favoring the bull view.
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.
