I am making public a premium update for NFTRH subscribers that was emailed and posted here for subscribers a couple days ago. Two reasons… 1) I want you to consider subscribing because I believe NFTRH is the most comprehensive and grounded market management service out there, including in-week updates like this one and a weekend letter loaded with evolving information taking shape in a rational manner, and 2) because there is still very relevant information in this post that I think public readers can benefit from.
To begin, what I perceive as the notable event of the day is that the gold-silver ratio (GSR) has broken out. This was included as part of a public post earlier today. Here is the chart from that post…
As you know, we have followed versions of this chart for years and with respect to the Ascending Triangle, over the last year or so. Today was the breakout. If it holds, then the macro stands to be affected significantly.
So unless traditional laws of economics have gone totally dysfunctional the rise of gold vs. silver (while both decline nominally) is acting as a deflationary impulse indicator. While this is having a devastating effect on silver, gold, commodities and some global markets, it has not affected the US stock market yet.
But the other side of the coin is the view that the GSR’s running mate on this cycle, the US dollar, would eventually lead the economy to start fraying around the edges (manufacturing for instance). A lower Chicago PMI was part of today’s data fest (data from MarketWatch). Each item showed deceleration today.
Of course one day’s data gloom could be the next day’s cause for cheer since these data releases are so jumpy. Here is the balance of the week, featuring ISM manufacturing tomorrow and ‘Jobs’ on Friday. Those are probably the two key items for our purposes in trying to gauge what is upcoming for the economy and hence the cyclical view (positive for stocks) and the counter cyclical view (eventually positive for gold).
Speaking of gold (very briefly as I believe we are clear as to the downside targets for nominal gold and silver), we will use the relationship between gold and silver as a metallic credit spread (hat tip: Hoye) on the macro right along with every other indicator that seems to be telling a valid story in managing these markets going forward. Gold (counter cyclical) vs. Commodities (cyclical) for instance, remains buoyant and supportive of the big picture global economic contraction thesis.
Back on this week’s data, there is a lag effect between what the currency and indicators are doing and what the economy burbs up in real time. So I want to be clear that this is not a forecast on this week’s data, which could easily remain buoyant. Now, when the data do start to degrade, along with the strong dollar and caution in the indicators, it would be time for all hands on deck for macro changes.
Dialing it back to the here and now on the US stock market, I want to update the Dow, SPX and NDX charts we reviewed this morning. Here is how they closed the day…
DOW remained below the short-term trend line. Thus the bears have the edge.
SPX remained below resistance and the bears remained in control for another day.
NDX is still okay above key support, but it too held within the short-term trend channel. Slight and I mean slight edge to the bears.
Why include the US headline indexes in a macro update? Because the macro is not going to change as long as the Good Ship Lollipop sails in smooth waters. If that were to happen, the deflationary pain would continue to be felt in the inflation sensitive areas while the US market squeezes everything it can out of the Goldilocks scenario.
Bottom Line
With TIP vs. TLT (inflation expectations indicator) burrowing south, junk vs. quality bond spreads breaking down, and even Small Cap leadership having been abdicated for the market, the break out in the GSR should be another negative for stocks. Now it is up to the daily charts above to prove that case or deny it. The parameters are the same as from this morning’s update.
Two key considerations on the stock market
Against: The above noted GSR breakout.
For: Ref. Hulbert’s over bearish HNNSI on the Nasdaq.
As for the precious metals and commodities, the GSR breakout could mean that recent trends will accelerate until they flame out. This could bring a gut wrenching resolution to the precious metals bear sooner rather than later, and if the economy begins showing outward signs of the deceleration that the strong dollar and upwardly mobile GSR indicate, some other areas not so used to the pain could begin to resolve negatively as well.
The Bottomest Line continues to be to have cash and be ready for changes, assuming that the GSR breakout was not a false one and that a reversal is not imminent. That would be the ‘bounce’ scenario we have been talking about (probably led by silver and commodities). Personally, I’d prefer to get on with things rather than get a bounce doomed to eventually fail. If the GSR continues upward, we should be getting on with things.
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