Category: US & Canada

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US Market Snapshot

Bull/Bear Market Indicator
Stock Market Pricing Indicator

The gauge on the left indicates whether the market is in a bull or bear phase, and the indicator on the right reflects the current stock market valuation. Stock market pricing indicates whether stocks are cheap or expensive in relation to earnings, but it is a poor indicator of market timing. We do not recommend selling stocks because market valuations are high; however, we recommend exercising caution when adding new positions.

Bull/Bear Market

The Bull/Bear indicator remains at 40%, warning of a bear market ahead. One labor market data indicator (highlighted in orange below) remains delayed due to the recent US government shutdown.

Bull-Bear Market Indicator

Employment in cyclical sectors has declined by 111,000 from its February peak of 27,824,000. A decline of 300,000 would trigger a recession warning. Cyclical sectors — Manufacturing, Construction, Transportation, and Warehousing — account for less than 20% of the total workforce but typically experience most job losses during a recession.

Cyclical Employment

The University of Michigan consumer survey reported the lowest index value ever recorded for current economic conditions since the survey began in 1960.

University of Michigan: Current Economic Conditions

However, the stock market remains buoyant and has not yet confirmed the bear signal.

Stock Pricing

Stock pricing increased slightly to 98.50 percent from 98.48 percent last week, close to its high of 98.66 percent in late October and well above the low of 95.04 percent in April. The extreme pricing warns that stocks are at risk of a significant drawdown.

Stock Market Value Indicator

We use z-scores to measure each indicator’s current position relative to its historical data, with results expressed in standard deviations from the mean. We then calculate an average of the five readings and convert that to a percentile. The higher stock market prices are relative to their historical mean, the greater the risk of a sharp drawdown.

The S&P 500 Forward Price-Earnings ratio is at 25.0, compared to the historic high of 28.0 during the Dotcom bubble and a 50-year moving average of 16.3. Before the 1999/2000 Dotcom bubble, the forward PE had never risen above 20.0 over the preceding century.

S&P 500 Forward Price-Earnings Ratio

Conclusion

The bull-bear indicator at 40% signals a bear market ahead, while the extreme pricing increases the risk of a significant drawdown.

Acknowledgments

Notes

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US Market Snapshot

Bull/Bear Market Indicator
Stock Market Pricing Indicator

The gauge on the left indicates whether the market is in a bull or bear phase, and the indicator on the right reflects the current stock market valuation. Stock market pricing indicates whether stocks are cheap or expensive in relation to earnings, but it is a poor indicator of market timing. We do not recommend selling stocks because market valuations are high; however, we recommend exercising caution when adding new positions.

Bull/Bear Market

The Bull/Bear indicator remains at 40%, warning of a bear market ahead. One labor market data indicator (highlighted in orange below) remains delayed due to the recent U.S. government shutdown.

Bull-Bear Market Indicator

Continued unemployment claims declined to 1.838 million, seasonally adjusted. No explanation was provided for the sharp fall, with Wolf Richter attributing it to problems with seasonal adjustments and the holiday season. Unadjusted data show a similar decline in the last week but a year-on-year increase of 43K (2.5%).

Continued Claims

The Chicago Fed National Financial Conditions Index declined -0.546 on December 5, indicating loose monetary conditions that support high stock prices.

Chicago Fed National Financial Conditions Index

However, Bitcoin is still testing support at 90,000. The cryptocurrency provides an up-to-date view of liquidity, and a fall below 85,000 would warn of another financial market contraction.

Bitcoin (BTC)

Stock Pricing

Stock pricing eased slightly to 98.48 percent from 98.55 percent last week, compared to a high of 98.66 percent in late October and a low of 95.04 percent in April. The extreme pricing warns that stocks are at risk of a significant drawdown.

Stock Market Value Indicator

We use z-scores to measure each indicator’s current position relative to its historical data, with results expressed in standard deviations from the mean. We then calculate an average of the five readings and convert that to a percentile. The higher stock market prices are relative to their historical mean, the greater the risk of a sharp drawdown.

Conclusion

The bull-bear indicator at 40% signals a bear market ahead, while extreme price levels increase the risk of a significant drawdown.

Acknowledgments

Notes

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The real risk of a Fed rate cut

Key Points

  • ADP National Employment Report estimates that the private sector shed 32,000 jobs in November.
  • Traders are pricing in an 89% chance of a 25-basis-point rate cut by the Fed on December 10.
  • ISM Manufacturing and Services PMI shows inflation is not yet under control.
  • A rate cut will likely weaken the Dollar, increase demand for real assets, and drive up long-term yields.

The ADP National Employment report estimates that the economy lost 32,000 jobs in November, the 3-month moving average turning negative for the first time since the height of the pandemic in August 2020.

ADP Private Sector Jobs

Losses are heavily weighted toward small firms, which have taken a hit from tariffs, shedding 120,000 jobs in November, while mid-sized firms added 51,000 jobs and large firms 39,000.

ADP Private Sector Jobs

The Fed is expected to announce a 25-basis-point rate cut on December 10 in response to weak jobs data. Markets are pricing in an 89% probability of a cut, with the discount rate on 13-week T-Bills falling below the Fed’s current 3.75% to 4.00% target range for the fed funds rate.

3-Month T-Bill Discount Rate

Other parts of the economy remain resilient, with the ISM Services PMI increasing to 52.6% for November, well above the 48.6% breakeven level typical of past contractions.

ISM Services PMI

New orders also signal expansion, but the rate slowed to 52.9%.

ISM Services New Orders

Employment has improved over the past four months, but remains in a contraction.

ISM Services Employment

Most importantly, from the Fed’s perspective, 65.4% of enterprises reported increased prices, down from 70% in October but still reflecting strong inflationary pressures.

ISM Services Prices

The Manufacturing sector reported similar price rises in November, though the rate of increase is slowing.

ISM Manufacturing Prices

Financial Markets

The Chicago Fed National Financial Conditions Index edged higher to -0.522 for the week ending November 21.

Chicago Fed National Financial Conditions Index

Dynamic indicators, however, like Bitcoin below, continue to warn of a sharp contraction in financial market liquidity.

Bitcoin (BTC)

The secure overnight financing rate (SOFR) jumped to 4.12%, above the 4.0% rate the Fed charges on its standing repo facility (SRF), signaling that the Fed is struggling to control pricing in the $12 trillion repo market. Repo lending is primarily secured by US Treasury Bills and Notes, and a spike in the SOFR repo rate would trigger a sharp sell-off in the Treasury market.

Secured Overnight Financing Rate (SOFR) & Interest on Reserve Balance (IORB)

Rising long-term yields in Japan and Europe are sucking liquidity out of US financial markets. The Bank of Japan (BOJ) is also expected to hike its policy rate on December 18, with the 3-month Japanese Government Bill discount rate jumping to 0.633%, well above the current 0.50% policy rate.

Japanese Govt 3-Month Bill Discount Rate

A BOJ rate hike would likely trigger a sell-off in US financial markets as hedge funds unwind large carry trades funded in Japanese Yen.

The US Dollar Index broke support at 99 and is expected to fall sharply in December, taking a double hit from a Fed rate cut and a BOJ rate hike, which would narrow the current spread by an estimated 50 basis points.

Dollar Index

Treasury Markets

Long-term Treasury yields are softening in anticipation of a Fed rate cut, but could face a sell-off amid tightening liquidity.

10-Year Treasury Yield

Stocks

The S&P 500  also rallied in anticipation of a Fed rate cut, but again, the rally risks being undone by contracting liquidity.

S&P 500

Mag 7 technology stocks continue to show gains over the past 6 months, apart from Meta Platforms (META), with Alphabet (GOOGL) building an advantage in the competition to lead AI.

Magnificent 7 Technology Stocks

Small caps are also strengthening, with the Russell 2000 ETF (IWM) testing resistance at 250.

Russell 2000 Small Cap ETF (IWM)

Gold & Silver

Gold is retracing to test support at $4,200, with high prices taming investor enthusiasm for the present.

Spot Gold

Silver is consolidating in a narrow band above support at $58 per ounce. Respect of support would confirm our target of $62.

Spot Silver

Energy Metals

Energy metals are another prospective inflation hedge for investors.

The Sprott Uranium Miners ETF (URNM) broke resistance at 56, joining copper and lithium miners in an uptrend.

Sprott Uranium Miners ETF (URNM)

The Sprott Copper Miners ETF (COPP) broke resistance at 31.50, confirming a fresh advance.

Sprott Copper Miners ETF (COPP)

Sprott Lithium Miners ETF (LITP) is also in an uptrend since breaking resistance at 11.

Sprott Lithium Miners ETF (LITP)

Conclusion

Forced to choose between its two mandates, the Fed seems willing to prioritize maintaining full employment ahead of stable prices. Cutting rates while the unemployment rate is low (below 5.0%) may please President Trump, who wants to run the economy hot, but risks a sharp rebound in inflation.

High inflation would lower the debt-to-GDP ratio but would likely increase outflows from US Treasury markets and raise long-term interest rates as international bond investors demand a higher risk premium. It would also later necessitate a sharp increase in interest rates to get the genie back in the lamp.

Falling Bitcoin prices and rising secure overnight funding rates in the $12 billion repo market signal tight liquidity in financial markets. Unwinding carry trades may destabilize financial markets if the Bank of Japan hikes its policy rate on December 18 as expected. A Fed rate cut and a BOJ rate hike would narrow the current carry trade spread by an estimated 50 basis points, risking a sharp sell-off in several trillion dollars of US assets financed in Yen.

The danger is that the Fed may reintroduce QE to stabilize the repo market, as it did during the last Powell pivot in September 2019.

Demand for gold, silver, and energy metals — copper, lithium, and uranium — is likely to increase as concerns over inflation grow.

Acknowledgments

Posted on

US Bear Market & Extreme Pricing

Bull/Bear Market Indicator
Stock Market Pricing Indicator

The gauge on the left indicates whether the market is in a bull or bear phase, and the one on the right reflects the current stock market valuation levels. Stock market pricing indicates whether stocks are cheap or expensive in relation to earnings, but it is a poor indicator of market timing. We do not recommend selling stocks because the market valuation is high; however, we recommend exercising caution when adding new positions.

Bull/Bear Market

The Bull/Bear indicator remains at 40%, signaling a bear market ahead. We have received updates for two of the three market indicators that were delayed by the US government shutdown, but are still waiting on an update for heavy truck sales (marked in orange below).

Bull-Bear Market Indicator

The Chicago Fed National Financial Conditions Index eased to -0.538 on November 14, indicating loose monetary conditions that support high stock prices.

Chicago Fed National Financial Conditions Index

However, a steep plunge in Bitcoin over the last few days warns of a liquidity contraction that will likely show up in financial conditions in the next few weeks.

Bitcoin (BTC)

Continued unemployment claims increased to almost 2 million, while the unemployment rate rose to 4.4%, both reflecting a slowly deteriorating labor market.

Continued Claims & Unemployment Rate

Of greater concern is the loss of 100 thousand jobs in cyclical sectors since February. A fall of 300 thousand from the February high would signal risk-off. Employment in manufacturing, construction, and transport and warehousing accounts for sizable job losses during a recession, which typically triggers an economic contraction.

Jobs in Cyclical Industries

Stock Pricing

Stock pricing decreased slightly to 98.15 percent, compared to a high of 98.66 percent in late October and an April low of 95.04 percent. The extreme pricing warns that stocks are at risk of a significant drawdown.

Stock Market Value Indicator

We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average of the five readings and convert that to a percentile. The higher that stock market pricing is relative to its historical mean, the greater the risk of a sharp drawdown.

The S&P 500 climbed to a record high of 3.28 times sales, compared to its long-term average of 1.8 times sales, an 82% premium.

S&P 500 Price-to-Sales

Conclusion

The bull-bear indicator at 40% warns of a bear market ahead, while extreme pricing increases the long-term risk of a significant drawdown.

Acknowledgments

Notes

Posted on

US Extreme Stock Pricing

Bull/Bear Market Indicator
Stock Market Pricing Indicator

The gauge on the left indicates whether the market is in a bull or bear phase, and the one on the right reflects the current stock market valuation levels. Stock market pricing indicates whether stocks are cheap or expensive in relation to earnings, but it is a poor indicator of market timing. We do not recommend selling stocks because the market valuation is high; however, we recommend exercising caution when adding new positions.

Bull/Bear Market

The Bull/Bear indicator remains at 40%, signaling a potential bear market ahead. Updates to three market indicators (highlighted in orange below) are delayed because of the US government shutdown. The first BLS release of delayed data is scheduled for Thursday, November 20.

Bull-Bear Market Indicator

The Chicago Fed National Financial Conditions Index eased to -0.5349 on November 7, indicating loose monetary conditions that support high stock prices. However, a sharp decline in Bitcoin over the last few days warns of a contraction.

Chicago Fed National Financial Conditions Index

Stock Pricing

Stock pricing increased slightly to 98.37 percent, compared to a high of 98.66 percent in late October and an April low of 95.04 percent. The extreme pricing warns that stocks are at risk of a significant drawdown.

Stock Market Value Indicator

We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average of the five readings and convert that to a percentile. The higher that stock market pricing is relative to its historical mean, the greater the risk of a sharp drawdown.

A forward PE of 24.8 indicates the S&P 500 is trading at more than a 50 percent premium to its long-term average of 16.1 times projected earnings.

S&P 500 Forward PE

Conclusion

The bull-bear indicator at 40% warns of a bear market ahead, while extreme pricing increases the long-term risk of a significant drawdown.

Acknowledgments

Notes

Posted on

Cass Freight Shipments Index Plunges

Key Points

  • Economic activity is contracting. The Cass Freight Shipments index signals a recession.
  • Bitcoin warns of a sharp contraction in financial market liquidity, which is likely to affect stock prices.

The Cass Freight Shipments (seasonally adjusted) Index declined to 0.984, a level typically associated with recession.

Cass Freight Index - Shipments (SA)

The decline confirms the earlier signal from our leading indicator.

A year-on-year decline of more than 2.0% in the 12-month moving average of the unadjusted Cass Freight Shipments Index provides a leading indicator of recessions.

Cass Freight Index - Shipments (NSA)

Financial Markets

Bitcoin continues to decline, warning of a sharp contraction in financial market liquidity that will likely affect stock prices.

Bitcoin (BTC)

The secured overnight funding rate (SOFR) increased to the Fed’s standing repo facility rate (blue dashes below), which is now 4.0%. The higher SOFR rate indicates that the repo market is having to pay a premium over the rate paid on reserve balances (pink) to attract sufficient funding from commercial banks.

Secured Overnight Financing Rate (SOFR), Interest on Reserve Balance (IORB) & Standing Repo Facility (SFR)

When monetary conditions are looser, the repo market is primarily funded by money market funds, which are prepared to accept a lower rate than the IORB, only offered by the Fed to commercial banks.

Stocks

The S&P 500 rallied after a gap down at the open, but was unable to hold onto gains.

S&P 500

Treasury Markets

10-year Treasury yields shot up to 4.15%, suggesting that the prospects of a December rate cut are again fading.

10-Year Treasury Yield

Rising long-term rates caused a pull-back in gold and silver. We expect gold to retest support between $3,900 and $4,000 per ounce, but respect will likely indicate another test of $4,400.

Spot Gold

Silver is similarly retracing to test support between 50 and 46.

Spot Silver

Conclusion

The Cass Freight Index recession signal reinforces last week’s warning from the Freightwaves CEO of a crisis in the long-haul freight industry.

The sharp contraction in financial market liquidity risks a correction in stock prices.

Gold and silver pulled back on a rally in long-term interest rates, but we remain bullish on their long-term prospects.

Acknowledgments

Posted on

Stocks fall, gold rises

Key Points

  • Bitcoin broke support at 100K, signaling that financial market liquidity is contracting.
  • Major stock indices and ETFs declined as Fed officials hosed down prospects of a December rate cut.
  • Copper and uranium miners are falling, indicating doubts over the AI infrastructure buildout.
  • Gold rallied to $4,200 per ounce, signaling a flight to safety.

Bitcoin broke long-term support at $100,000, signaling a financial market contraction.

Bitcoin (BTC)

Repo markets continue to signal stress, with the secured overnight financing rate (SOFR) above the rate paid on reserve balances.

Secured Overnight Financing Rate (SOFR) & Interest on Reserve Balance (IORB)

The $7 trillion in money market funds is already tapped out, attracted by the sizable premium of the SOFR above the overnight reverse repo rate offered by the Fed.

Secured Overnight Financing Rate (SOFR) & Overnight Reverse Repo Rate

In 2023, the Fed lowered the overnight reverse repo rate (pink above) to encourage money market funds to shift their investments to the repo market. The $2.3 trillion outflow into the repo market helped offset the effects of the Fed’s securities sales (QT), creating the illusion of monetary tightening without actual tightening.

Fed Reverse Repo (RRP) Liabilities

Stocks

The Nasdaq QQQ ETF fell more than 2.0%. The lower Trend Index peak above zero indicates secondary selling pressure, which will likely test support at 590.

Invesco Nasdaq 100 ETF (QQQ)

Demand for copper and uranium is expected to increase, with AI hyperscalers projected to invest an estimated $5 trillion in data centers and related infrastructure. Copper is required for both electrical and cooling purposes, so hesitation in the Sprott Copper Miners ETF (COPP) suggests growing doubts over the AI buildout. A breach of support at 28 would be a bearish sign for the AI-heavy tech sector.

Sprott Copper Miners ETF (COPP)

Demand for uranium is also projected to grow, with the IEA forecasting that global electricity demand from data centers will more than double by 2030 to approximately 945 terawatt-hours (TWh). However, declining Trend Index peaks on the Sprott Uranium Miners ETF (URNM) warn of rising selling pressure.

Sprott Uranium Miners ETF (URNM)

Gold

Gold rallied to test resistance at $4,200 per ounce as financial markets shifted to a risk-off stance. A breakout above $4,400 would offer a target of $5,000.

Spot Gold

Conclusion

Financial markets are signaling tighter liquidity, which will likely cause a secondary correction in stocks.

We are overweight in gold and gold miners, and underweight in high-multiple technology stocks.

We see long-term growth in copper and uranium, but are wary of a correction in the short-term.

Acknowledgments

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