Stocks are retreating across the board after climbing to dizzy heights in recent weeks. They continue to enjoy support, however, from falling Treasury yields and robust financial market liquidity. Support from crude oil is less certain, with a potential up-trend that could delay interest rate cuts.
Gold and silver are also retreating after strong gains in recent weeks. The correction appears to be a secondary movement. Base metals copper and aluminum are also weakening but the sell-off appears far stronger.
Stocks
Three out of seven mega-caps in the S&P 500 (Nvidia, Tesla, and Meta Platforms) show gains on Thursday, while four declined.
The S&P 500 as a whole declined steeply, headed for a test of support at 5500.
The equal-weighted index ($IQX) took a similar pounding, breaking support at 6900. Retracement that respects the new resistance level would confirm a target of 6600.
The retreat is across the board, with the Russell 2000 Small Cap ETF (IWM) [pink] falling faster than Russell 1000 Large Caps ETF (IWB) [blue] after spectacular gains earlier in the week.
Treasuries
Ten-year Treasury yields are retracing to test resistance at 4.2%. Respect is likely and would confirm our short-term target of 4.0%. Declining Trend Index peaks below zero continue to warn of downward pressure on yields. The low inflation outlook is bullish for bonds.
Financial Markets
Commercial bank reserves at the Fed finished largely unchanged for the week ended Wednesday, July 17, suggesting stable liquidity levels.
Bitcoin is retracing to test support at $60K; respect would signal rising liquidity in financial markets.
Labor Market
Initial claims climbed to 243K for the week ended July 13. This still well below levels normally seen leading up to a recession.
Continued unemployment below 2.0m indicate a tight labor market.
The Conference Board Leading Economic Indicator shows signs of a recovery after initially warning of a recession with a fall below -5.0%.
Dollar & Gold
The Dollar index reversed its sharp fall from Wednesday. Penetration of the descending trendline would warn of another test of 105 but we think this is unlikely considering the fall in Treasury yields.
Gold retreated below support at $2,450 per ounce, indicating another test of $2,400. Respect of $2,400 would signal another attempt at $2,500, while breach would warn of a correction to $2,300.
Silver followed through below $30, headed for a test of primary support at $29.
Declining Trend Index peaks warn of medium-term selling pressure. But respect of support at $29 per ounce would suggest a target of $35 per ounce.
Crude Oil
Nymex WTI crude steadied at close to $83 per barrel. Respect of resistance at $84 would be a strong bear signal.
Brent crude is similarly testing resistance at $86 per barrel. Breach of support at $84 would be a strong bear signal.
Base Metals
Copper broke support at $9,400 per metric ton. Expect retracement to test the new resistance level but respect is likely and would confirm the long-term target of $8,000.
Copper and aluminum track each other closely. The down-trend below has a likely target of $2,200 and is bearish for copper.
Conclusion
Stocks and precious metals appear headed for a much-needed correction after climbing to dizzy heights in recent weeks.
Of the three pillars, falling Treasury yields and robust financial market liquidity continue to support stocks. But crude oil is less certain, with a potential up-trend that would threaten higher inflation and could delay interest rate cuts.
Gold and silver are also retreating, after strong gains in recent weeks, in what appears to be a secondary correction. Support would provide a base for further gains.
But weakness in copper and aluminum is more concerning, signaling slowing demand from China which could easily trigger a global recession.
Acknowledgements
- CoinDesk: Bitcoin Prices
- Conference Board: US Leading Indicators
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He founded PVT Capital (AFSL number 546090), which provides income and growth strategies to wholesale clients.
Colin also co-founded Incredible Charts and writes the popular Patient Investor newsletter.
Using a top-down approach, Colin identifies macro trends in the global economy and then combines fundamental and technical analysis to evaluate opportunities in sectors that stand to benefit.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
