NFTRH

Negative Signals Continue to GatherIn an NFTRH Excerpt posted at the site on Monday we noted that the Gold-Silver ratio (GSR) rising in tandem with the US dollar is a negative indicator for the US stock market and economy.  These two horsemen usually ride together in opposition to asset markets, with the last 2 years being an exception where US stocks are concerned.  With the USD getting back in alignment with the GSR, the situation is ripe for a bearish turn.

The rising GSR and USD join waning market sponsorship indicators like the S&P 500’s Participation index, which is negatively diverging rising prices.  A similar condition exists in most US markets currently.

We will not take up too much space putting in graphical views of other bearish market sponsorship indicators but they are gathering rapidly.  This includes declining junk bond to investment grade and Treasury bond spreads, a trend toward reduced exposure to the market by the ‘smarter’ of the NAAIM investment managers, which usually precedes market declines and gold (counter cyclical) vs. commodities (cyclical), which has been rising lately.

Emerging (downside) Leadership

In an [NFTRH/NFTRH+] update at the site on September 12 we noted that the Emerging Markets (MSEMF/EEM) had broken down vs. the broad US market (SPX/SPY) and that nominal EEM was in danger of losing support.  We noted that a breakdown in EEM could be followed by a hard bounce to test the breakdown and that is exactly what happened, providing a shorting opportunity yesterday for anyone interested.  Beyond trading, the EM downside leadership is another important signal for global markets.

US Stocks

As for the nominal SPY, a loss of the 50 day moving average would change the trend to down.  It is not broken yet, but the lower September low is a caution signal.  Taking out the August low would set a firm downtrend and set the stage for a potentially intense correction.

Again, we are not using technicals to project the current bearish backdrop.  They are still relatively intact on the headline indexes like the S&P 500, Dow and NDX.  We are using fading market sponsorship in the form of waning participation by the non-headliners.  The financial services industry touts that this simply means you should rotate to the largest stocks.  That could be a big mistake as liquidity comes out of the market and all sectors take a correction.  Usually the selling impulse, if it gains traction, makes its way through most sectors eventually.

Precious Metals

Silver is broken and gold is semi-broken; get over it.  This eLetter began life in the jaws of the precious metals bear market and I distinctly recall writing about technical bear flags and unhealthy fundamentals in early eLetters.  We now look ahead to a time of change; a  macro pivot if you will.

Silver has broken down like so many other commodities.  Referring back to the top segment of this letter, note that Gold vs. Silver and the USD are running mates in a risk off environment.  This will eventually translate to a new bull market in gold because the real bull markets are formed during liquidity crises, not during inflationary times with every commodity tout disguised as a guru is pumping the “death of the dollar”.

The going could be choppy in the interim until the macro fully shifts, but we have noticed a distinct refusal by the miners to break down as gold and especially silver have already done.  NFTRH is currently managing bounce potential and then the nature of any coming bounces (i.e. just that, a bounce or something more?) in real time.  For now, here is a picture of positive divergence by the junior miners GDXJ.

Bottom Line

The macro is changing folks.  This could be for a correction or something worse.  We should not subscribe to hyperbole and call it something before it’s time.  So as things stand now, the S&P 500 stands to correct its over valuation per this chart.

Of course, we have maintained all along that the bubble is in policy, not the stock market.  So if you think the S&P is vulnerable by its juxtaposition against corporate profits above, have a look at the chart below.  That is risk incarnate, built in by unnatural policy inputs from the Fed, running for nearly 6 years now.

It is due to the dangerous dynamics built into the post 2008 up cycle that we are even interested in gold and especially its miners on a coming counter cycle.  Please tune out the sector promoters and realize that out of control inflation is not the preferred backdrop, but rather the economic counter cycle.  That is where gold, even if it remains muted in USD terms, out performs most other assets.  That would be a fundamental buy signal on quality gold stocks to coordinate with appropriate technical setups in real time.

For now the word remains patience (and perspective) as interesting market events play out around the world.

Notable articles at the website since the last eLetter:

• The Specter of Global Debt Default  EWI, 9.25.14
• Pivotal Events  Bob Hoye, 9.25.14
• India Rising  biiwii, 9.25.14
• Small Caps vs. Large Caps  biiwii, 9.25.14
• COMPQ Thins Out  biiwii, 9.24.14
• Hulbert HGNSI & Gold  biiwii, 9.24.14
• Hedge Funds Surpass 2007 Leverage  EWI, 9.23.14
• Currencies Weekly View  biiwii, 9.23.14
• Emerging Bear?  biiwii, 9.22.14
• The Macro View and the Stock Market  biiwii, 9.22.14

“Gary, Loved NFTRH 309! Thanks for keeping an even keel to things.”  –John P  9.21.14

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