Gold Gets Hammered But Copper Fails To Seize The Moment

The Copper/Gold ratio remains at a key decision point. Gold has been clobbered lately but a key metallic macro indicator remains in a long-term congestion zone. If it’s going to be cyclical ‘inflation ON’ we’d expect Cu/Au to break through and do what it has not done since a major inflation trade blew out in 2006-2008, and for the 30yr Treasury yield to eventually catch on and rise at least to the EMA 100 (blue line).

copper/gold ratio & 30 year treasury yield

Here is the daily futures view of Cu/Au. Going by simple TA (daily trends) it looks poised to break out to the upside, especially in the face of a government at the ready to pump Trillions more funny munny into the economy. The economically cyclical metal would benefit over the more counter-cyclical monetary metal. It’s logical, but still theoretical. Markets do not always do the logical thing, now do they? Continue reading "Gold Gets Hammered But Copper Fails To Seize The Moment"

Stock Market Risk Not Yet Realized

The stock market is at high risk, but…

The ‘but’ is the old saying “markets can remain [seemingly] irrational longer than you can remain solvent” if you fight a trend that is intact at any given point. Since March 2020 that trend has been up.

Structurally Over-bullish

Below is a chart showing the 10-week exponential moving average of the Equity Put/Call ratio (CPCE) that we review periodically in NFTRH for a view of the structural over-bullish situation in stocks. I write structural because it has extended much longer than extremes in the CPCE have done at previous ‘bull killer’ danger points, after which risk was realized in the form of moderate to severe corrections.

The trend began logically enough at a ‘bear killer’ reading in the midst of max pandemic fear. We noted at the time that market participants were not just bearish, not just risk-averse, but absolutely terrified. So the recipe is this: take 1 lump of terrified investors, add a heaping helping of the Fed’s money printing and voila, enjoy the taste of a slingshot rally that is very filling despite its inflationary odor.

Risk? Well, when SPX took out the previous 2020 high last summer we established a target of 4400 (conservative) to 4600 (at an extreme). The market is in the target zone, CPCE has begun to labor up and out of the structurally over-bullish floor and well, it could be a signal of a later stage bull market. But a warning about jumping into a heavily active bearish position is that using the run-up to 2016 as an example, the pressure can build for months, even years before risk is realized. Another caveat to going full frontal bear is that the EMA 10 is starting to hook down again as pressure is being relieved lately. Continue reading "Stock Market Risk Not Yet Realized"

Stock Market: What Happens When Rates Rise?

The broader indices have been in a blistering bull market for a year straight, only accelerating from November 2020 into April 2021. The rally has been largely uninterrupted, with minor blips in September and October of 2020 before reaching new all-time highs after new all-time highs by mid-April. The initial rally was narrowly focused on technology and the stay-at-home economy stocks. With the improving vaccine prospects, November saw a sea change with broad market participation with value stocks breaking out with huge moves to the upside. To boot, Washington's massive stimulus is being priced into the markets via fiscal and monetary stimulus. All three major indices (S&P 500, Nasdaq, and Dow Jones) are at all-time highs and continue to break into uncharted territory in what seems like a daily basis.

Stocks are overbought and at extreme valuations, as measured by any historical metric (P/E ratio, Shiller P/E ratio, Buffet Indicator, Put/Call Ratio, and percentage of stocks above their 200-day moving average) or technical metric (Bollinger Bands and Relative Strength Index - RSI). Valuations are stretched across the board, with the major averages at all-time highs and far above pre-pandemic levels. A rise in rates due to inflation could be lurking in the shadows of this frothy market.

If/When Inflation Hits

If the Consumer Price Index (CPI) continues to push higher, The Federal Reserve may be compelled to entertain the idea of raising rates finally. Although interest rate risk disproportionally impacts fixed-income investments such as bonds and annuities, stocks will undoubtedly be impacted as well. This is especially true for highly leveraged companies such as tech and super-charged growth companies. Even the prospect of higher rates hit the Nasdaq in March for a sharp decline, albeit that decline was quickly erased. This is a case in point of how quickly the markets can turn negative with the hint of rising rates which may be exacerbated in an already frothy market. Continue reading "Stock Market: What Happens When Rates Rise?"

The Year The World Fell Down The Rabbit Hole

Conspiracies and bias hurt investors. It’s no wonder so many people have been unable to attain proper market positioning in 2020. You invest with your heart, soul, fears, or even sometimes your intellect and you risk blowing yourself up at worst, or missing out at best. For much of 2020 Twitter has been a forum for ‘influencers’ with tens of thousands of followers spewing dogma and influencing their herds alright. I watched it happen all year, in the Twitter machine and at other venues.

You know the perma-bearish or ‘got gold?’ types, issuing dire warnings and authoritative discussion of just how bad off the world is (well, it ain’t good, I grant them that). But it’s the practical reaction or lack thereof, not the news itself that matters.

So Warren Buffett bought a gold stock. The gold “community” immediately seized upon it as validation and an opportunity to lecture the herds. What it actually was though, was a top prior to a healthy and much-needed correction (handily, right from our long-standing target of HUI 375).

Buffett Buys a Gold Stock! Continue reading "The Year The World Fell Down The Rabbit Hole"

Irrational Exuberance?

The broader indices have been in a raging bull market since the COVID-19 induced lows in March of 2020. The rally has been largely uninterrupted, with minor blimps in September and October before reaching all-time highs by early December. The initial rally was narrowly focused on technology and the stay-at-home economy stocks. With the improving vaccine prospects, November saw a sea change with broad market participation with value stocks breaking out with huge moves to the upside. To boot, massive stimulus coming out of Washington is being priced into the markets. All three major indices (S&P 500, Nasdaq, and Dow Jones) are at all-time highs. Are stocks overextended underpinned by irrational exuberance considering the damaging economic consequences that COVID-19 inflicted on the worldwide economy? Are markets getting ahead of themselves as investors bet on a return to normal for the global economy? Stretched valuations, options put/call ratios, broad participation, and P/E ratios may be potential warning signs of near-term pressures.

irrational exuberance

Fundamentals – Lofty P/E Ratios

Price-to-Earnings ratios are largely discordant with the economic backdrop and at historically lofty levels. Outside of the tech bubble in 1999/2000, the current P/E ratio of the S&P 500 composite is the highest on record, exceeding that of the Roaring Twenties (Figure 1). Continue reading "Irrational Exuberance?"