Tag: Bitcoin (BTC)

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S&P 500 weakens and gold rallies

Key Points

  • The S&P 500 closed above 6300 for the first time, supported by strong liquidity
  • But declining Trend Index peaks warn of a retracement
  • Consumer Confidence remains weak, and the Conference Board Leading Economic Index signals a recession
  • Gold and silver rallied as the dollar weakened

The S&P 500 closed above 6300 for the first time, but declining Trend Index peaks warn of selling pressure. Expect retracement to test support at 6100.

S&P 500

The Dow Jones Industrial Average also signals weakness, with declining Trend Index peaks indicating selling pressure.

Dow Jones Industrial Average

The Broad DJ US Index (red) has underperformed the DJ World ex-US index (blue) over the past six months.

DJ US Index ($DJUS) & DJ World ex-US ($W2DOW)

Financial Markets

Financial markets grow increasingly supportive, with the Chicago Fed National Financial Conditions Index (NFCI) declining to -0.54. Values above zero are considered restrictive.

Chicago Fed National Financial Conditions Index

Bitcoin has retraced slightly from resistance at $120K, but still signals bullish market conditions.

Bitcoin (BTC)

Treasury Markets

10-Year Treasury yields declined to 4.35%, but rising Trend Index troughs signal continued buying pressure.

10-Year Treasury Yield

Economy

Consumer confidence remains low, with the Conference Board index declining by 5 points to 93, similar to levels during the 2020 pandemic.

June’s retreat in confidence was shared by all age groups and almost all income groups. It was also shared across all political affiliations, with the largest decline among Republicans.

Conference Board: Consumer Confidence

The Conference Board’s Leading Economic Index (LEI) declined to 99.8% in June. Six-month growth in the LEI (blue) fell to an annualized -5.6%, below the -4.1% that signals a recession (marked in red).

Conference Board Leading Economic Index - Recession Signals

The black line on the above chart indicates negative growth in more than 50% of the LEI components below over the past six months. A broad decline confirms the recession signal.

Conference Board Leading Economic Index - Components

Dollar & Gold

The Dollar Index retreated below support at 98, signaling another decline. A breach of support of 96.50 would strengthen our long-term target of 90.

Dollar Index

Gold rallied to test resistance at $3,400 per ounce. A breakout above $3,400 would offer an immediate target of $3,500 and strengthen our year-end target of $4,000.

Spot Gold

Silver is testing resistance at $39 per ounce. A breakout would offer a target of $42, but declining Trend Index peaks warn of stubborn resistance.

Spot Silver

Conclusion

The S&P 500 closed at a new high, but declining Trend Index peaks warn of selling pressure.

The Dow Industrial Average respected resistance at 45,000, failing to confirm the S&P 500 bull market signal.

Financial market conditions indicate strong liquidity, but consumer confidence is weak, and the Conference Board Leading Economic Index signals a recession.

The US Dollar Index retreated below support at 98, triggering a rally in gold and silver. A gold breakout above $3,400 would offer an immediate target of $3,500 and strengthen our year-end target of $4,000. A silver breakout above $39 would offer a target of $42, but declining Trend Index peaks warn of stubborn resistance.

Acknowledgments

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Long bonds fall as CPI rises, stocks and gold remain bullish

Summary

  • Global long bond yields are rising, driven by fears over government debt levels
  • A sharp jump in services CPI warns of rising inflation in the broad economy
  • Strong liquidity boosts demand for stocks and for gold

Global long bond yields are rising, driven by fears over government debt levels.

Japan’s 30-year JGB yield jumped to a record 3.20% on Tuesday as opposition parties favoring tax cuts and loose monetary policy are expected to gain influence after the July 20 election. (Reuters)

German 30-year government bond yield is testing resistance at 3.26%, the highest since 2011. Investor concerns are focused on increased debt issuance—to fund defense and infrastructure spending—and rising international rates. (Reuters)

The 30-year US Treasury yield is testing resistance at 5.0%, the highest since 2007. The monthly charts below provide a long-term perspective.

30-Year Treasury Yield

10-year Treasury yields are expected to follow, testing resistance at 5.0%.

10-Year Treasury Yield

Rising yields are driven more by long-term structural issues than immediate concerns over an uptick in inflation.

CPI Inflation

CPI growth jumped to 2.7% for the twelve months to June, while core CPI, excluding food and energy, increased by 2.9%.

CPI & Core CPI - Annual

Sticky price CPI and the 16% trimmed mean, reflecting underlying inflationary pressures, jumped to 2.5% and 3.2% respectively.

Sticky CPI

More surprising was the sharp rise in CPI for services, excluding shelter, which is less affected by tariff increases than goods. The June figure is close to a 7.0% annual growth rate.

CPI Services excluding Shelter Rents

This confirms the earlier ISM Services PMI, which showed a sharp rise in the Prices sub-index in May and June. According to the ISM, fourteen of eighteen service industries reported increased prices paid in June. (ISM)

ISM Services Prices

Energy

Energy CPI showed negative growth for the twelve months to June, contributing significantly to the overall low headline CPI rate.

CPI & CPI Energy - Annual

Shelter

Shelter CPI comprises 35% of headline CPI. However, compared to the Case-Shiller 20-City Composite Home Price Index below, we find the index highly artificial and misleading.

CPI Shelter

Food

Food CPI growth increased in June to an annualized rate of 3.8%.

CPI Food

Stocks

The S&P 500 eased slightly in response to the CPI increase, but this is hardly noticeable on the monthly chart below.

S&P 500

The Dow Jones Industrial Average retreated from resistance at 45K. However,  rising Trend Index troughs signal long-term buying pressure, and a breakout above 45K would confirm the S&P 500 bull market signal.

Dow Jones Industrial Average

Financial Markets

Moody’s Baa Corporate bond spread declined to 1.73% after a sharp spike in March-April, indicating ready credit availability.

Moody's Baa Corporate Bond Spreads

The uptrend in Bitcoin indicates strong animal spirits, which are likely to spill over to stocks.

Bitcoin (BTC)

Dollar & Gold

The US Dollar Index is retracing to test resistance at 100 on the monthly chart below. Respect will likely confirm another decline, and our target of 90.

Dollar Index

Gold is consolidating in a bullish pennant on the monthly chart. Rising Trend Index troughs also signal buying pressure. A breakout above 3450 would strengthen our target of 4000 by year-end.

Spot Gold

Conclusion

Long bond yields are rising due to concerns over precarious public debt levels and growing fiscal deficits.

Inflation is still a secondary consideration, but a sharp rise in the CPI for services in June warns of higher inflation in the broader economy. Services are less impacted by tariffs, which are only likely to affect CPI after current pauses have expired and tariff rates are settled.

Liquidity remains strong, supporting high stock prices. A Dow Jones Industrial Average breakout above 45K would confirm the S&P 500 bull market signal.

Demand for gold is also strong, and a breakout above $3,450 per ounce would signal another advance, strengthening our target of $4,000 by year-end.

Acknowledgments

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Bitcoin blast-off bullish for S&P 500

Summary

  • Bitcoin reaches a new high
  • The bullishness is expected to spill over into stocks

Bitcoin blasted through resistance at 110K, reaching a new high at 117.6K, signaling a surge of animal spirits in financial markets.

Bitcoin (BTC)

The result is bound to be bullish for US stocks. The S&P 500 recovered above 6250, while higher Trend Index troughs signal buying pressure.

S&P 500

A breakout of the Dow Jones Industrial Average above 45K would confirm the S&P 500 bull market signal.

Dow Jones Industrial Average

Financial Markets

The Chicago Fed National Financial Conditions Index decreased to -0.51 on July 4, signaling easy monetary conditions.

Chicago Fed National Financial Conditions Index

Dollar & Gold

The US Dollar Index is retracing to test resistance at 98. Respect will likely confirm the downtrend. Our target is 90.
Dollar Index

Gold continues its bullish consolidation between 3200 and 3430. An upward breakout would strengthen our target of 4000 by year-end.

Spot Gold

Silver broke out from its recent pennant consolidation at 36, offering a short-term target of 39. Rising Trend Index troughs indicate buying pressure.

Spot Silver

Conclusion

Bitcoin warns of a sharp rise in bullish sentiment.

A Dow breakout above 45K would confirm a bull market.

This reminds us of the final leg of the bull market during the Dotcom bubble, from 1999 to 2000. It was great for traders but terrible for investors.

Acknowledgments

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Big Beautiful Bill threatens bond market blowout

Summary

  • The bond market reacted to the record tax and spending bill in Congress that extends tax cuts for corporations and the wealthy
  • The bipartisan Committee for a Responsible Federal Budget estimates the bill would add between $3.3 trillion and $5.2 trillion to the US federal debt, depending on whether policymakers extend temporary provisions
  • A weak bond auction lifted long-term yields
  • The dollar fell, while gold climbed above 3300

I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.

~ James Carville, political consultant and lead strategist for Bill Clinton’s successful 1992 presidential campaign.

10-Year Treasury Yield
Weak bond auction

A $16 billion auction of 20-year Treasury bonds on Wednesday attracted less than usual interest, with yields rising to 5.127% after the auction.

“We’ve seen several soft 20-year bond auctions and it has a checkered history as a benchmark issue,” said Thomas Simons, chief U.S. economist at Jefferies in New York. “This one was not one of the best by any stretch of the imagination, but it also wasn’t one of the worst.”

Simons said while the auction was “far from a disaster,” it showed there was not going to be a reversal in the sell-off at the long end of the yield curve anytime soon. (Reuters)

Why is this a problem?

Liz Ann Sonders, Charles Schwab’s chief investment strategist, responded to a question on CNBC:  Is 4.58% on the 10-year a problem for the bond market?

It’s not so much the level that matters, it’s the “Why?” If this was driven by the growth trajectory, that would be great. But the fact is it’s driven by uncertainty with regard to inflation, and the Fed’s expected reaction. The wattage on the spotlight aiming at the debt and deficit has been turned up. The investor class cares deeply about this issue but the average voter can’t even conceptualize what 30-plus trillion dollars means and doesn’t tend to vote based on this. This spotlight on the issue is a good thing and will increase the chance that something gets done.

President Trump’s “big, beautiful” tax bill

The House Rules Committee advanced President Trump’s “big, beautiful” tax bill late Wednesday after 21 hours of debate and amendments, sending the legislation to the floor where it is expected to receive a final vote early Thursday morning.

The package includes a major spending increase for immigration enforcement and the military, and it would extend Trump’s 2017 tax cuts, which are scheduled to expire at the end of this year. It includes a series of cuts to Medicaid, food assistance, and clean energy funding to pay for the trillions of dollars in tax cuts and new red ink. (CNBC)

The bipartisan Committee for a Responsible Federal Budget estimates the bill would add between $3.3 trillion and $5.2 trillion to US federal debt by 2034, depending on whether policymakers extend temporary provisions. (Reuters)

Rep. Chip Roy, R-Texas, and House Freedom Caucus chair Andy Harris, R-Md., were among the members who met with Trump at the White House Wednesday afternoon, in a hastily arranged effort to convince fiscal hawks to set aside their objections and back the deficit-exploding package of tax cuts.

Meanwhile, markets tumbled on concerns that Trump’s spending bill would pass, leading to exploding federal deficits and weaker long-term fiscal health. The yield on the 30-year Treasury bond hit 5.09%. (CNBC)

The Dollar & the Dow

The dollar weakened, with the US Dollar Index breaking below 100. Follow-through below 98 would warn of a long-term decline with a target of 90.

Dollar Index

The Dow Jones Industrial Average closed below its former primary support level at 42K. A follow-through below 41.5K would close the recent gap, signaling another test of primary support at 37K.

Dow Jones Industrial Average

Financial Markets

Recent weakness comes despite a sharp recovery in liquidity, with the Chicago Fed National Financial Conditions Index falling to -0.58.

Chicago Fed National Financial Conditions Index

Bitcoin also reached a new high of 110K, signaling a sharp increase in risk appetite in financial markets.

Bitcoin (BTC)

Gold & Physical Demand

Gold climbed above 3300, headed for a test of the resistance band between 3400 and 3500. A breakout would strengthen our target of 4000 by the end of 2025.

Spot Gold

A 700% year-over-year spike in COMEX physical gold deliveries in May 2025 (16,000 contracts, $5.3 billion), the largest in history, reflects unprecedented physical demand from institutions, possibly including the US government or Treasury. Despite the recent correction, gold’s rally to 3300 demonstrates resilience, with physical demand overwhelming paper price suppression. (Andy Schectman)

Conclusion

President Trump’s “big, beautiful tax bill” threatens a bond market revolt, with a steep rise in long-term Treasury yields if passed. The 10-year Treasury yield respected support at 4.5%, warning of a test of resistance at 5.0%.

Rising long-term yields would likely cause a sharp fall in the Dow and S&P 500.

The bipartisan Committee for a Responsible Federal Budget estimates the bill would add between $3.3 trillion and $5.2 trillion to US federal debt by 2034, depending on whether policymakers extend temporary provisions.

The dollar is weakening, and breakout of the US Dollar Index below 98 would confirm a long-term decline with a target of 90.

Gold is rising, and a breakout above 3500 would strengthen our long-term target of 4000 by the end of 2025.

Acknowledgments

Posted on

Gold rallies as the dollar weakens

Summary

  • The S&P 500 is consolidating below 6000, and financial market liquidity is improving
  • However, US stocks are underperforming their global counterparts
  • Gold rallies as LT Treasury yields rise and the dollar weakens

The S&P 500 is consolidating between 5800, its former primary support level, and 6000 on the weekly chart below. Breakout to a new high would signal a return to bull market conditions, but we expect strong resistance between 6000 and 6100.

S&P 500

The Dow Jones Industrial Average has similarly recovered above former primary support at 42K, but does not yet signal a reversal to a primary uptrend.

Dow Jones Industrial Average

US stocks continue to underperform their global counterparts, with the broad DJ US Index (DJUS) lagging the Dow Global ex-US ($W2DOW).

DJ US Index ($DJUS) & DJ World ex-US ($W2DOW)

Financial Markets

Bitcoin reached a new high at 107K, signaling strong risk appetite in financial markets.

Bitcoin (BTC)

A sharp fall in high-yield (junk) corporate bond yields signals improving credit availability in financial markets.

Junk Bond Spreads

Treasury Markets

10-Year Treasury yields are retracing to test new support at 4.5%. Respect will likely confirm our target of 5.0%.

10-Year Treasury Yield

Economy

The Conference Board’s leading economic index plunged sharply to 99.4% in April, the 1.0% drop following a 0.8% fall in March. The LEI is blue on the chart below.

Conference Board Leading Economic Index

Widespread weakness across the LEI’s ten components warns of a broad slowing of the economy.

Conference Board Leading Economic Index - Components

The LEI below 100 warns of a recession ahead (black line below), but six-month growth in the LEI (blue below) has not quite reached -4.1%, which would trigger a recession signal (red).

Conference Board Leading Economic Index - Recession Signals

Dollar & Gold

The Dollar Index is retracing to test the band of support between 98 and 100. Breach of support would signal long-term dollar weakness, offering a target of 90.

Dollar Index

Gold found support at 3200 and, after breaking above 3250, is headed for a test of resistance between 3400 and 3500. Our long-term target is 4000 by the end of 2025.

Spot Gold

Silver is testing resistance at 34. Breakout would offer a target of 39.

Spot Silver

Conclusion

The S&P 500 is rallying as financial market liquidity improves, but we expect strong resistance between 6000 and 6100. US stocks continue to underperform their global counterparts, while the Conference Board’s leading economic index warns that the US economy is headed for recession.

10-year Treasury yields are rising, and respect of support at 4.5% would offer a target of 5.0%, another bear signal for stocks. The dollar is weakening, reflecting international capital outflows from US financial markets. A breakout of the Dollar Index below long-term support at 100 would warn of another decline, with a target of 90.

Gold is rising as the dollar weakens, and we expect another test of resistance between 3400 and 3500. Breakout would signal a fresh advance towards our long-term target of 4000 by the end of 2025.

Acknowledgments

Posted on

Strong uptrends in stocks and gold

A longer-term view, with weekly charts, shows stocks and gold in a healthy bull market. The energy sector is bearish, indicating low short- to medium-term inflation, as are industrial metals.

Stocks

The S&P 500 closed above 6100, signaling a fresh advance. Expect retracement to test the new support level, but respect will likely confirm a target of 6400.

S&P 500

Mega-cap technology stocks are the primary driver, with large caps lagging. Lower Trend Index peaks on the S&P 500 equal-weighted index ($IQX) warn of selling pressure, and another test of primary support at 7000 is likely.

S&P 500 Equal-Weighted Index

Financial Markets

Bitcoin consolidates above 90K, indicating stable liquidity in financial markets.

Bitcoin (BTC)

Treasury Markets

The 10-year Treasury yield signals another test of support at 4.4%. Respect is more likely, and another test of 4.8% would be bearish for stocks.

10-Year Treasury Yield

Dollar & Gold

The Dollar Index has weakened in the last two weeks as the Trump administration threatens to disrupt the global trading system with increased tariffs. Respect of support at 106 remains likely, but a breach would offer a target of 102.

Dollar Index

Gold is in a strong uptrend. The current retracement will likely respect support at $2,800 per ounce, confirming our target of $3,000.

Spot Gold

Energy

Crude is in a bear market, with Nymex WTI crude respecting resistance at $80 per barrel. We expect crude to remain range-bound for most of the year.

Nymex WTI Crude

We are long-term bulls on uranium, but there are no buy opportunities. The Sprott Physical Uranium Trust (SRUUF) confirmed the bear market, breaking support at 16 to signal another decline.

Sprott Physical Uranium Trust (SRUUF)

Copper

Copper rallied strongly over the last two weeks, testing resistance near 10K. However, the move is not driven by an increase in end-user demand. From Mining.com:

Worries that US President Donald Trump may impose tariffs on copper had spurred traders and investors to buy copper on the US COMEX exchange and sell on the LME.

Short or bearish positions on the LME are being cut or rolled over ahead of settlement on Wednesday, turning discounts for nearby copper contracts against those further along the maturity into premiums or backwardations.

Copper

Iron & Steel

Iron ore continues its gradual downtrend.

Iron Ore

Australia

The ASX 200 recovered above resistance at 8500, confirming a medium-term target of 8900.

ASX 200 Index

Conclusion

US and Australian stocks are in an uptrend, supported by strong liquidity in financial markets. However, the Trump administration’s trade policies have unsettled markets, making them susceptible to higher-than-normal volatility.

Bonds are in a bear market, and the 10-year Treasury yield is expected to resume its uptrend.

Gold continues in a strong uptrend, with demand driven by geopolitical changes. Respect of support at $2,800 per ounce would confirm our short-term target of $3,000.

Industrial metals remain in a bear market due to weak demand from China.

 

 

 

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Inflation dips?

The 10-year Treasury yield retreated after the release of December CPI data, with breach of the rising trendline signaling a correction to test support at 4.5%.

10-Year Treasury Yield

However, the monthly chart below shows the long-term uptrend is unchanged, with the 10-year yield expected to reach 5.0%. Breakout above resistance would warn of an advance to 6.0%.

10-Year Treasury Yield

CPI Inflation

Core CPI (ocher) dipped slightly to 3.2% for the twelve months to December, while headline CPI (red) increased to 2.9%, holding stubbornly above the Fed’s 2.0% target.

CPI & Core CPI - Annual

Monthly data shows a sharp spike in headline CPI in December, increasing at an annualized rate of 4.7%. Core CPI, however, slowed to 2.7% (annualized).

CPI & Core CPI - Monthly

Energy

The difference is energy costs, excluded from core CPI, which jumped 2.63% in December, warning of rising energy prices in 2025. The December increase equates to an annualized rate of more than 30%.

CPI Energy

Energy prices are a key vector for transmitting inflation. Prices rise steeply during a boom as expanding demand outstrips inelastic supply, and the opposite occurs during a recession when falling energy demand causes a surplus. Energy prices (orange below) rose ahead of headline CPI (red) in 2021 and fell ahead of its subsequent decline in 2022 – 23.

CPI & CPI Energy - Annual

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Services

CPI for services (excluding shelter) was a low 0.099% in December or 1.2% annualized. Services generally indicate more persistent inflation, so the Fed will likely treat this as a win.

CPI Services excluding Shelter Rents

Long-term Inflation Outlook

Long-term inflation expectations are rising, with the University of Michigan 5-year outlook climbing to 3.3%.

University of Michigan: 5-Year Inflation Expectations

We do not anticipate a significant hike in CPI in early 2025, but there are warning signs of a rebound.

Brent Crude

Brent crude has climbed to above $80 per barrel on fears that new sanctions on Russian shipping will impact supply. Retracement that respects support at $80 would confirm another advance.

Brent Crude

Stocks

Mega-cap technology stocks rebounded from yesterday’s fall, with the two most volatile Nvidia (NVDA) and Tesla (TSLA) showing gains.

Top 7 Technology Stocks

The S&P 500 index recovered above resistance at 5850, indicating another test of the high at 6100.

S&P 500

Large caps also enjoyed support, with the equal-weighted index ($IQX) testing resistance at 7200. Breakout would indicate another test of 7600.

S&P 500 Equal-Weighted Index

Growth stocks rebounded from their recent sell-off relative to defensive stocks. However, the Russell 1000 Large Cap Value ETF (IWD) has outperformed the Russell 1000 Large Cap Growth ETF (IWF) over the past month.

Russell 1000 Large Cap Value ETF (IWD) & Russell 1000 Large Cap Growth ETF (IWF)

Financial Markets

Bitcoin is again testing resistance at $100K. Reversal below $90K would warn of a liquidity contraction likely to affect stocks and bonds, but there are signs that financial conditions are easing. Breakout above $100K would confirm.

Bitcoin (BTC)

Expanding liquidity is partly attributable to a $350 billion fall in Fed overnight reverse repo operations in January after an equally sharp rise in December caused a contraction.

Fed Overnight Reverse Repo Liabilities

The Chicago Fed National Financial Conditions Index declined to -0.63 on January 10, suggesting similar financial easing to 2021.

Chicago Fed National Financial Conditions Index

Moody’s Baa corporate bond spread has also narrowed to 1.44%, the lowest since the 1990s, which indicates ready credit availability.

Moody's Baa Corporate Bond Spreads

Gold

Fears of persistent inflation drive gold and geopolitical tensions fuel further demand. A higher Trend Index trough indicates rising buying pressure and a breakout above $2,725 per ounce would signal another test of $2,800.

Spot Gold

The monthly chart below shows the long-term view, where breakout above resistance at $2,800 (green) would offer a target of $3,600.

Spot Gold

Conclusion

Our three pillars supporting financial markets are 10-year Treasury yields, crude oil prices, and financial market liquidity.

Financial market liquidity is strong and supports demand for stocks and bonds with easy access to leverage.

Crude oil prices have been subdued since 2023, with strong production from non-OPEC+ producers (especially the US) and weak demand from China. However, geopolitical tensions now threaten supply, with Brent crude rising above $80 per barrel. The risk is that higher energy prices cause a resurgence of inflation and drive up long-term interest rates.

Inflation concerns over a tight labor market were temporarily allayed by December’s weak core CPI and services CPI growth. However, rising energy costs will likely increase input costs, causing a rebound in the months ahead. Market concerns over inflation are expected to grow as the incoming administration attempts to stimulate an economy already at close to capacity. The 10-year Treasury yield may briefly retrace to test support but is then likely to continue its long-term uptrend. Breakout above 5.0% would offer a target of 6.0%, which would be bearish for stocks and bonds.

We are underweight growth stocks trading at high earnings multiples and are avoiding financial instruments with a duration longer than two years.

Gold will likely benefit from a higher long-term inflation outlook and rising geopolitical tensions. We are overweight gold and defensive stocks trading at reasonable multiples relative to earnings.

Acknowledgments

Posted on

Inflation fears threaten higher interest rates

Markets are hesitant ahead of December CPI data due for release in a few hours.

Fearful of a resurgence in inflation, Treasury investors are driving up long-term interest rates, with the 10-year yield headed for a test of 5.0%.

10-Year Treasury Yield

Long-term inflation expectations are rising, with the University of Michigan 5-year outlook climbing to 3.3%.

University of Michigan: 5-Year Inflation Expectations

Producer prices are also rebounding, with services PPI recovering to 4.02% in December.

PPI Services

We do not anticipate a significant hike in CPI, but there are warning signs of a rebound.

Brent Crude

Brent crude climbed to $80 per barrel on the threat of new sanctions on Russian shipping impacting supply. Retracement that respects support at $76 would warn of another advance.

Brent Crude

Energy prices are a key vector for inflation. The chart below shows how energy CPI (orange) rose ahead of headline CPI (red) in 2021, and its fall in 2022 – 23 was instrumental in inflation’s subsequent decline.

Energy CPI & Headline CPI

Stocks

Mega-cap technology stocks are dragging the S&P 500 down, with former frontrunner Nvidia (NVDA) falling 7.2% over the past two months. Tesla (TSLA) has also shed almost half its December gains.

Top 7 Technology Stocks

The S&P 500 index is retracing to test resistance at 5850. Respect would warn of a further decline to 5700.

S&P 500

Large caps enjoy more support, with the equal-weighted index ($IQX) respecting key support at 7000.

S&P 500 Equal-Weighted Index

Rising long-term interest rates have set off a migration from high-multiple growth stocks to more defensive value sectors, with the Russell 1000 Large Cap Value ETF (IWD) outperforming the Russell 1000 Large Cap Growth ETF (IWF) in the past few weeks.

Russell 1000 Large Cap Value ETF (IWD) & Russell 1000 Large Cap Growth ETF (IWF)

Financial Markets

Bitcoin struggles to break resistance at $100K as financial market liquidity tightens. A reversal below $90K would warn of a liquidity contraction likely to affect stocks and bonds.

Bitcoin (BTC)

Gold

Fears of persistent inflation drive gold and geopolitical tensions fuel further demand. A higher Trend Index trough indicates rising buying pressure and a breakout above $2,725 per ounce would signal another test of $2,800.

Spot Gold

The monthly chart below shows the long-term view, where breakout above $2,800 would offer a target of $3,600.

Spot Gold

Conclusion

Rising long-term Treasury yields reflect the growing risk of long-term inflation.

The outlook is bearish for growth stocks trading at high earnings multiples and financial instruments with a duration longer than two years.

We remain bullish on gold and defensive stocks.

Acknowledgments

Posted on

Fed shock – really?

Stocks plunged on indications that the Fed would slow further rate cuts after announcing a 25-basis-point cut at the FOMC press conference on Wednesday.

Really? That could be seen coming for months. The economy has proven resilient, unemployment is low, and retail sales are growing. The obvious question is: “Why cut rates at all?”

FOMC Decision

As expected, Chairman Jerome Powell announced a 25-basis-point rate cut, lowering the fed funds rate target to 4.25% to 4.5%.

Financial markets were spooked by the sharp jump in FOMC projections for rate cuts next year. The Dot Plot now centers on a further 50 basis points of rate cuts in 2025, a target range of 3.75% to 4.0%.

FOMC Dot Plot

Compare that to the September projection below, which was equally divided between 100 and 125 basis points of cuts next year, a range of 3.0% to 3.5%.

FOMC Dot Plot - September

Powell explained that:

  • The economy is “strong” and has made good progress towards the Fed’s goals.
  • The job market has cooled but remains “solid.”
  • Inflation continues to move towards the Fed’s 2% target.

The Fed Chair provided further background in answers to reporters’ questions:

  • “We feel that slowing the pace of future adjustments seems prudent now, especially as we expect inflation to be stickier than we initially thought.”
  • “Some FOMC members did cite future inflationary fiscal policy as a concern.”
  • “Most forecasters keep calling for a slowdown in economic growth, but we haven’t seen it yet and don’t see one happening soon. The US economy is doing great.”
  • “We’re not too worried (about loose financial conditions). Both inflation and labor have cooled, so our policy is working. Financial conditions aren’t impeding us.”

Fed Balance Sheet

Powell announced that QT would continue at the same rate, but the rate offered on reverse repo (RRP) would be lowered, which may encourage further money market outflows into the T-Bill market. Total Fed holdings of Treasuries and mortgage-backed securities (MBS) have fallen by $1.9 trillion since their peak of $8.5 trillion in 2022.

Fed Balance Sheet: Treasuries and Mortgage-Backed Securities (MBS)

Only another $6.0 trillion to go. 😟

Treasury Markets

Ten-year Treasury yields jumped. Breakout above resistance at 4.5% would offer a target of 5.0%, which would be bearish for stocks and precious metals.

10-Year Treasury Yield

Stocks

The S&P 500 plunged to support at 5860. Breach would signal a test of 5700.

S&P 500

Tesla (TSLA) dipped sharply after a spectacular two months, peaking at +117%, compared to Nvidia (NVDA) at -6.6%.

Top 7 Technology Stocks

The weekly chart of the equal-weighted S&P 500 index ($IQX) shows a breach of support at 7150, likely headed for a test of 6900. The lower Trend Index peak identifies selling pressure but is still above zero, indicating that the primary trend remains intact.

S&P 500 Equal-Weighted Index - Weekly

Financial Markets

The Chicago Fed National Financial Conditions Index dipped to -0.66% on December 13, indicating “loose” monetary conditions. Moody’s Baa corporate bond spreads are also at a thirty-year low, reflecting easy credit conditions.

Chicago Fed National Financial Conditions Index & Moody's Baa Corporate Bond Spreads

Bitcoin retraced to test support at $100K, but the strong uptrend still signals abundant financial market liquidity.

Bitcoin (BTC)

Dollar & Gold

The Dollar has strengthened in response to rising Treasury yields, with the Dollar Index breaking resistance at 108.

Dollar Index

The Bank of Japan may be forced to raise interest rates again to support the Yen, which could cause an outflow from US financial markets as carry trades unwind.

Japanese Yen - Weekly

Gold broke support at $2,625 per ounce, signaling a test of primary support at $2,550.

Spot Gold

The long-term uptrend, shown on the weekly chart below, remains intact.

Spot Gold - Weekly

Silver similarly broke support at $30 per ounce, but a breach of primary support at $26.50 remains unlikely.

Spot Silver - Weekly

Conclusion

The Fed is riding a wave of deflationary pressure from the global economy, led by China. The bear market in crude oil and copper signals that global demand is contracting. Low inflation should enable further rate cuts next year, but the pace will likely slow as the Fed is wary of a resurgence in domestic demand.

The prospect of inflationary economic policies from the new administration could set off a public feud between Donald Trump and the Fed chairman. Stimulating an economy that is already close to full employment would force the Fed to hike rates to ease inflationary pressures, attracting the ire of the new president.

US financial markets, with rising long-term Treasury yields, are sucking up global liquidity and more than offsetting Fed tightening (QT). The strong Dollar increases pressure on international borrowers in the Eurodollar market as domestic exchange rates weaken. The Bank of Japan may also be forced to hike interest rates again to support the Yen, causing further unwinding of the carry trade and outflows from US financial markets.

The S&P 500 is overdue for a correction, but the primary uptrend is unlikely to reverse unless there is a sharp contraction in financial market liquidity.

Gold and silver are undergoing a sharp correction, but the primary uptrend remains intact. Two long-term fundamental trends support precious metals. First, central banks are increasing their gold reserves and reducing currency reserves as the global sovereign debt bubble expands. Second, in response to a collapsing domestic real estate market, Chinese investors are switching focus to gold and silver as a store of wealth.

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The last guardrail

In the above ABC interview, Professor Nouriel Roubini said it would be interesting to watch Trump deal with financial markets:

He said if Trump was “really serious” about 60 per cent tariffs on China, and 10 to 20 per cent tariffs on other trading partners, about sharply weakening the value of the US dollar, about “draconian restrictions” on migration and “mass deportation”, and about tax cuts that weren’t funded by raising other taxes or cutting spending, it could lead to situations Trump wouldn’t like.

“If he tries to follow these policies that are stagflationary, interest rates are going to be much higher, bond yields are going to be higher, the Fed will have to raise rates rather than cutting them, the stock market is going to correct,” he said.

“He cares about the bond market. He cares about the stock market. And therefore market discipline, as opposed to political discipline … [will] be the main constraint [for him].”

Long-term Treasury bonds continued their downtrend after November 5.

iShares 20+Year Treasury Bond ETF

Ten-year yields are testing resistance at 4.5%. A breakout above 4.5% would likely cause a correction in stocks.

10-Year Treasury Yield

Fears of rising inflation are not the only factor driving Treasury yields higher. Since 2020, Treasury issuance has been skewed towards short-dated T-bills, with the issuance of notes and bonds (green) kept as low as possible to suppress long-term yields.

Treasury Issuance

A study by Hudson Bay Capital concluded that rolling back the excess $1 trillion in T-bill issuance would cause a 50 basis point rise in the 10-year yield—equivalent to a 2.0% rise in the Fed funds rate—before settling at a permanent 30 basis point increase.

Also, Fed QE almost exclusively focused on purchasing notes and bonds to keep long-term yields as low as possible. Reducing the Fed’s balance sheet through QT increases the supply of notes and bonds, driving long-term yields higher.

Fed Holdings of Treasury Notes & Bonds and T-bills

Rising long-term yields constrain the S&P 500, which is testing support at 5850. Breach would signal a correction to 5700.

S&P 500

Financial Markets

Bitcoin remains above 90K, signaling strong liquidity in financial markets.

Bitcoin (BTC)

Dollar & Gold

The Dollar index retraced to test support at its rising trendline, but breakout above 107 remains a threat, offering a target of 115.

Dollar Index

Gold rallied off support at $2,550 per ounce. Penetration of the descending trendline at $2,650 would indicate a base forming.

Spot Gold

Silver similarly found support at $30 per ounce.

Spot Silver

Energy

Brent crude remains in a bear market, which is likely to keep inflation in check as long as global demand remains subdued.

Brent Crude

Base Metals

Copper also reflects weak global demand, with another likely test of support at $8,600 per tonne.

Copper

Conclusion

Donald Trump’s election campaign was based on reviving a “weak” economy, which has proved surprisingly resilient. The Fed and Treasury succeeded in taming inflation without crashing the economy—a rare feat. However, their efforts have built up imbalances in the financial system that lie in wait for the unwary.

Stimulating an economy already close to full employment will inevitably cause higher inflation, preceded by a surge in long-term Treasury yields. The result would be a sharp fall in stock prices and a likely recession.

The Republican party may control the House and the Senate, but the final guardrail is the bond market. They ignore that at their peril.

Gold and silver fell as the Dollar soared in response to higher long-term Treasury yields. But yields are rising in anticipation of rising inflation. We remain bullish on gold and retain our $3,000 per ounce target.

Acknowledgments

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