A Macro View For Stocks, Commodities And Gold

Final rally for stocks, commodities to top, and a final down leg for gold?

This is one man asking one question among several I could be asking, given the volatility of macro indicators on a day-to-day, week-to-week basis. But as FOMC rides off into the sunset it is the scenario that I think is most probable, given the current state of some indicators we follow.

  • The yield curve is on a flattening trend that started signaling the beginning of the end of the inflation trades since the flattener began last April.
  • The Silver/Gold ratio has failed to establish any sort of firm signal to back the inflation trades since silver blew out with the ill-fated #silversqueeze promotion a year ago. That remains the case today.
  • Canada’s TSX-V index has gone bearish nominally and never did break its downtrend in relation to the senior TSX index. This is negative signaling for the more speculative inflation trades.
  • The Baltic Dry index of global shipping prices is in the tank, so to speak, having topped in October and dropped by 75% since.
  • Credit spreads are still intact, but bear watching as nominal junk bonds come under stress.
  • Industrial metals are still rising vs. the gold price, a still-intact macro positive, although Copper/Gold ratio continues to be undecided and a potential warning.
  • Gold had exploded upward vs. US (SPX/SPY) and global (ACWX) stocks. As we noted in an NFTRH update at the time, it would be subject to a potentially severe pullback whether or not the ratio has bottomed. The pullback started on Wednesday (FOMC day, and who is surprised?), and when gold bottoms vs. stocks the macro will be indicated to go quite bearish. For now, we’re neutral on the short-term.

With that macro backdrop in mind, let’s update three areas, US Stocks, Commodities, and Gold. Continue reading "A Macro View For Stocks, Commodities And Gold"

S&P 500 To Lose 30%?

It is not clickbait for hype. I will take you through my observations in this post to show you why it could play out.

Every market has its stages develop over time: Boom and Bust, Growth and Correction, Collapse and Consolidation. The corrective phase could be around for the stock market.

The main question, as always, is how deep it could drop when a retracement unfolds. This is not an easy one. To see the market from different angles, I built the comparison chart as I put the S&P 500 index itself (black bars), then I added Vanguard Value Index Fund ETF (VTV) (red line) and Vanguard Growth Index Fund ETF (VUG) (blue line).

S&P 500

This monthly chart starts from the major bottom in 2009. SINCE THEN, the S&P 500 index has gained more than 450% since then, the value stocks have scored more than 300%, while the growth stocks have made a jaw-dropping 715%. Continue reading "S&P 500 To Lose 30%?"

Market-Cap-Weighted Investing Has Been Good, But Will It Last?

The major US, and well world indexes, for that matter, are all market capitalization-weighted indexes. This means the index will own a particular amount of one company or another based on that company’s market cap. On the surface, this sounds fine. And decades ago, when the indexes were really starting, this method worked just fine. It was a fast, easy, and simple way for investors and money managers to put together the index.

But fast forward to today and beyond, and market cap indexes may not be the best solution due to the simple issue of the index being too heavily weighted. In a past article, I highlighted how the top 5 companies in the S&P 500 represented 23% of the index. That means 5 companies represent almost a quarter of what an index that supposedly tracks 500 companies is doing.

However, over the past few years, especially the past year, these top five companies, Apple (AAPL), Microsoft (MSFT), Amazon.com (AMZN), Facebook (FB), and Alphabet (GOOG), have performed incredibly well. So, investors who have ridden these market-cap-weighted indexes higher for a few years are very happy and have done very well.

However, there is always a downside risk, and with these market-cap-weighted indexes being so heavily weighted to the top 5 or 10 stocks, the risk is much higher than most investors fully understand. Continue reading "Market-Cap-Weighted Investing Has Been Good, But Will It Last?"

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?"

United States Still Going Bananas

You see, it’s not a Trump thing. It’s an ‘America is so hopelessly indebted (as are other developed economies) that they have no choice now’ thing.

However, the election shakes out – most likely Democrat president and congress, Republican senate – the stock market is cheering two things in my opinion. It is cheering US dollar compromising fiscal stimulus (Fed prints, politicians spend) and the coming of more US dollar compromising monetary policy (Fed prints, Fed monetizes bonds AKA debt, Fed screws with any other esoteric tool it can get its hands on in the age of MMT TMM, AKA Total Market Manipulation).

I have a still profitable position against the Euro that is about to tick un-profitable this morning. That was my hedge against a firming US dollar, which is the anti-market to the US stock market especially, but also to many global markets because I am long US and global stocks. I may have to pull back to hedging stocks (including gold stocks) with high cash levels. So says the ongoing inflationary operation.

I had projected an A-B-C bear market bounce in Uncle Buck, just to keep the macro honest and put a spook into market bulls. But it appears – due to the joy breaking out everywhere – that I will have been wrong about ‘C’. That’s what this breakdown below support (now short-term resistance) says, anyway.

dxy market

We are going bananas not because Trump is/was just another politician when it comes to the modern American tradition of debt-leveraged inflation to disenfranchise the middle and poor and enrich the already spectacularly wealthy. We are going bananas because Continue reading "United States Still Going Bananas"