Tag: S&P 500

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Bitcoin Plunge Signals Risk-Off

Key Points

  • Bitcoin plunged to $71,200, warning that financial markets are becoming risk-averse.
  • Brent crude surged to nearly $70 per barrel amid heightened US-Iran tensions.
  • Volatility following the CME margin hike, effective Monday, triggered a broad selloff in precious metals and energy transition metals.

Bitcoin2 (BTC) broke support at 85,000, the steep decline warning that financial markets are shedding risk assets.

Bitcoin (BTC)

The S&P 500 index retreated below 6900, but long tails and a rising Trend Index indicate strong buying interest.

S&P 500

However, the Roundhill Magnificent 7 ETF (MAGS) is headed for a test of primary support at 63, while Trend Index peaks at zero warn of selling pressure. A breach of support would be a strong bear signal.

Roundhill Magnificent 7 ETF (MAGS)

10-year Treasury yields are testing resistance at 4.3%. A breakout would offer a short-term target of 4.4%.

10-Year Treasury Yield

Dollar & Gold

The US Dollar Index is testing resistance at 98, but remains in a long-term downtrend. Respect of resistance will likely signal another decline.

Dollar Index

Gold is testing resistance at $5,000 per ounce after Friday’s sharp fall.

Spot Gold

The primary reason for the sharp fall in copper and precious metals was not Trump’s nomination of Kevin Warsh as the next Fed Chair. On January 29, the CME announced that it was again increasing margin requirements on futures contracts, effective Monday, February 2.

Comex Margin Increase

Comex Margins

The increase in CME margin requirements is intended to discourage leveraged speculation in key contracts that show signs of overheating.

Silver had a higher speculative interest, making it more susceptible to the margin hike, with the metal testing support at $70 per ounce.

Spot Silver

Energy & Energy Transition Metals

Brent crude is testing resistance at $70 per barrel on heightened US-Iran tensions.

Brent Crude

The Dow Jones Global Oil & Gas index is in a strong uptrend, with rising Trend Index troughs reflecting buying pressure.

Dow Jones Global Oil & Gas Index

Copper

The margin hike had less effect on copper, which retreated to $13,000 per tonne from its recent peak of $13,500 per tonne.

Copper

Copper miners were more susceptible to the risk-off shift in financial markets, with Sprott Copper Miners ETF1 (COPP) testing support at 40.

Sprott Copper Miners ETF (COPP)

Uranium

Uranium was not directly affected by the CME margin hike but was caught up in the broader selloff, with the Sprott Uranium Miners ETF1 (URNM) testing support at 70.

Sprott Uranium Miners ETF (URNM)

Lithium

Lithium suffered a similar fate, with Sprott Lithium Miners ETF1 (LITP) breaking support at 14.

Sprott Lithium Miners ETF (LITP)

Critical Minerals

Critical materials experienced a similar selloff, with Sprott Critical Materials ETF1 (SETM) testing support at 34.

Sprott Critical Materials ETF (SETM)

Conclusion

The CME margin hike, which took effect on Monday, was intended to cause a correction in copper and precious metals. However, the selloff spread to uranium, lithium, and critical materials. Risk aversion also spread to financial markets, as evidenced by a steep fall in risk assets such as Bitcoin.

Mega-cap technology stocks have experienced a selloff, with the Roundhill Magnificent 7 ETF (MAGS) approaching its primary support level. A breach of support would be a strong bear signal for the broader S&P 500 index, with market leaders falling behind their second-tier counterparts.

We can expect further CME margin hikes as the exchange seeks to curb speculative excesses. Volatility will likely discourage speculation but have minimal impact on the secular rise in demand for gold, copper, uranium, lithium, and critical materials.

Acknowledgments

Notes

  1. We analyze exchange-traded funds (ETFs) to determine market sentiment towards a specific sector, industry, or commodity. The analysis is not a recommendation to buy or sell, nor is it a commentary on the merits of the particular ETF.
  2. We analyze Bitcoin (BTC) — the most volatile risk asset — to identify risk sentiment in financial markets. Our analysis is not a recommendation to buy or sell, for which we are ill-equipped to express an opinion, nor is it a commentary on the merits of the cryptocurrency.
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Trump Backs Down

Key Points

  • President Trump backed off his threats to seize Greenland and said he will not impose additional tariffs on EU members.
  • Stocks rallied, but the mega-cap Magnificent 7 remain under pressure.
  • Gold and silver retraced to test new support levels.

From Reuters:

On a whirlwind trip to the World Economic Forum annual meeting in Davos, Switzerland, Trump backed down from weeks of rhetoric that shook the NATO alliance and risked a new global trade war.

Instead, Trump said, Western Arctic allies could forge a new deal that satisfies his desire for a “Golden Dome” missile‑defense system and access to critical minerals while blocking Russia and China’s ambitions in the Arctic. “It’s a deal that everybody’s very happy with,” Trump told reporters after emerging from a meeting with NATO Secretary General Mark Rutte. “It’s a long-term deal. It’s the ultimate long-term deal. It puts everybody in a really good position, especially as it pertains to security and to minerals.”
He added: “It’s a deal that’s forever.”

A NATO spokesperson said seven NATO allies in the Arctic would work together to ensure their collective security.
“Negotiations between Denmark, Greenland, and the United States will go forward aimed at ensuring that Russia and China never gain a foothold – economically or militarily – in Greenland,” the spokesperson said.

Trump said on his Truth Social platform that the US and NATO had “formed the framework of a future deal with respect to Greenland and, in fact, the entire Arctic Region,” and that “based upon this understanding, I will not be imposing the Tariffs that were scheduled to go into effect on February 1st.”

…Earlier in the day, the Republican US president acknowledged financial markets’ discomfort with his threats and ruled out force in a speech at the Swiss Alpine resort.
“People thought I would use force, but I don’t have to use force,” Trump said. “I don’t want to use force. I won’t use force.”

The S&P 500 rallied to test the former resistance level of 6900, but declining Trend Index peaks continue to indicate selling pressure.

S&P 500

The Nasdaq QQQ ETF displays similar selling pressure.

Invesco Nasdaq 100 ETF (QQQ)

Selling pressure on mega-cap technology stocks is more severe, with the Roundhill Magnificent 7 ETF (MAGS) testing primary support at 63, and the latest Trend Index peak at zero.

Roundhill Magnificent 7 ETF (MAGS)

Mega-caps are falling faster than small-cap stocks, with MAGS in a steep downtrend relative to the Russell 2000 Small Caps ETF (IWM).

Roundhill Magnificent 7 ETF (MAGS) relative to iShares Russell 2000 Small Caps ETF (IWM)

The post-Liberation Day regime has been particularly lucrative for the corporate halt and lame. As Apollo chief economist Torsten Slök pointed out yesterday, Russell 2000 members generating negative earnings per share have returned nearly 50% on average since the close of trading last April 2, some 20 percentage points better than the components operating in the black. Over the same period, a Goldman Sachs-compiled basket of the most heavily shorted stocks has generated a 61% return, leaving the S&P 500’s 21% figure in the dust. (Grant’s Daily)

US stocks are also underperforming their global peers, with the Dow Jones US Index ($DJUS) falling relative to the Dow Jones World Index excluding the US (W2DOW).

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

Financial Markets

Bitcoin broke support at 90,000 but is now retracing to test the new resistance level. Recovery above 90,000 would indicate that tight liquidity is easing.

Bitcoin (BTC)

10-Year Treasury yields eased to 4.243%, headed for a test of new support at 4.20%.

10-Year Treasury Yield

Dollar & Gold

The Dollar rallied after a sharp fall on Tuesday, but still displays long-term weakness.
Dollar Index

Gold is retracing after testing $4,900 per ounce on Tuesday. We expect retracement to test new support at $4,600.

Spot Gold

Silver is similarly retracing to test support, and a breach of $90 will likely indicate a correction to $80 per ounce.

Spot Silver

Conclusion

Gold and silver continue in strong uptrends. Demand is driven by concerns about geopolitical risk and fiscal stability, amid large deficits and precarious sovereign debt levels across many developed economies.

A reader asked if there are signs that a blow-off top is forming in gold and silver, but regular corrections to test new support levels ease pent-up demand and limit the risk of a blow-off.

Stocks rallied on news of easing tensions over Greenland, but mega-cap technology stocks lag. This signals the final stage of a bull market, when market leaders no longer lead the rallies and investors chase riskier small caps.

Acknowledgments

Posted on

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

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

Gold bear trap & the AI illusion

Key Points

  • Gold recovered above $4,100 per ounce, signaling another test of $4,400.
  • Silver similarly recovered above $50 per ounce.
  • Bitcoin at 106K indicates improving liquidity.
  • The S&P 500 also completed a bear trap, indicating another rally.
  • A recent Stanford study suggests that the adoption of generative AI has had a minimal impact on employment levels.

Gold recovered above $4,100 per ounce, completing a bear trap with a target of $4,400.

Spot Gold

Silver similarly recovered above $50 per ounce, offering a target of $54.

Spot Silver

Bitcoin, our real-time indicator of financial market liquidity, rallied to 106K. Respect of long-term support at 100K offers a target of 116K, indicating the liquidity squeeze is fading.

Bitcoin (BTC)

The S&P 500 completed a similar bear trap at 6750, suggesting a rally to test 7000. Follow-through above 6900 would confirm.

S&P 500

41 AI-related stocks dominate the market capitalization of the S&P 500. Investors have gone all-in on AI and its ability to generate future earnings.

S&P 500 AI-Related Stocks

Jonathan Levin argues in Bloomberg that, excluding the AI-related Tesla and Amazon, consumer-facing sectors of the S&P 500 are in recession.

S&P 500 Consumer Staples & Discretionary

A recent Stanford study on ChatGPT adoption indicates significant increases in productivity in fields with high adoption rates. However, it notes that the improved productivity has, so far, led to increased wage rates rather than reduced employment levels.

Treasury Markets

10-year Treasury yields are consolidating around 4.10%, with resumed BLS inflation readings likely to provide further direction.

10-Year Treasury Yield

Trump-appointee Fed Governor Stephen Miran on Monday repeated his call for a half-percentage-point cut at the FOMC December 9-10 meeting. (Reuters)

Consumer perceptions of long-term inflation remain elevated, with the University of Michigan survey indicating that perceptions of 5-year inflation have averaged 3.7% over the past three months.

University of Michigan: 5-Year Inflation Expectations

Dollar & Gold

The dollar has weakened following high private sector layoffs in October, with financial market pricing indicating a 63% chance of a 25-basis-point rate cut in December. (Reuters)

Dollar Index

JP Morgan estimates that the labor market added 52K jobs in September but lost 35K in October, increasing the likelihood of another rate cut in December.

JP Morgan Estimated Labor Market Growth

Conclusion

We expect further rate cuts to weaken the dollar and boost prices of gold and silver.

S&P 500 performance depends on projected AI productivity gains, driving a massive increase in earnings for AI-related corporations. However, there is currently limited evidence to support this conclusion.

Acknowledgments

Posted on

Xi pulls the rug on Trump

Key Points

  • China increased export controls on critical materials where it has a dominant share of production, two weeks ahead of a scheduled face-to-face meeting between leader Xi Jinping and President Trump.
  • The US President has threatened retaliation, including 100% tariffs on Chinese imports.
  • The S&P 500 plunged on Friday, and gold recovered above $4,000 per ounce as investors fear an escalating trade war.

In an escalation of the ongoing trade war between the US and China, China expanded export controls over a range of critical materials just two weeks ahead of a face-to-face meeting scheduled between Chinese leader Xi Jinping and President Trump, at APEC, in South Korea.

BEIJING, Oct 9 (Reuters) – China dramatically expanded its rare earths export controls on Thursday, adding five new elements and extra scrutiny for semiconductor users as Beijing tightens control over the sector ahead of talks between Presidents Donald Trump and Xi Jinping. The world’s largest rare earths producer also added dozens of pieces of refining technology to its control list and announced rules that will require compliance from foreign rare earth producers who use Chinese materials.

In a Truth social post, President Trump said the Chinese move was a “real surprise” and questioned whether the scheduled meeting should proceed.

NEW YORK, Oct 10 (Reuters) – Stocks fell sharply on Friday, with the S&P 500 and Nasdaq suffering their biggest one-day percentage declines since April 10, while Treasury yields dropped and the U.S. dollar weakened as comments by President Donald Trump reignited worries over a U.S.-China trade war. After markets closed on Friday, Trump said he was raising tariffs on Chinese exports to the U.S. to 100% and imposing export controls on “any and all critical software” in a reprisal against recently announced export limits by China on rare earth minerals critical to tech and other manufacturing.

Stocks

The S&P 500 plunged through short-term support at 6700 on fears of an escalating trade war. A follow-through below 6500 would offer a target of 6350 for the correction.

S&P 500

Financial Markets

Financial market conditions support high stock prices, with the Chicago Fed NFCI Index declining to -0.546 on October 3.

Chicago Fed National Financial Conditions Index

Bitcoin — our canary in the coal mine — retreated sharply to test support at 110K. Follow-through below 108K would warn of a significant contraction in financial market liquidity.

Bitcoin (BTC)

Treasury Markets

10-year Treasury yields are headed for another test of long-term support at 4.0%, shown on the weekly chart below.

10-Year Treasury Yield

Bond market guru Jim Bianco maintains that, with inflation “sticky” at 3.0%, a healthy yield curve would require the Fed to keep short-term rates 100 basis points higher at 4.0%, leaving little room for further cuts. He also warns that the 10-year should be another 100 basis points higher, at 5.0%.

The current trade war escalation will likely ensure the Fed cuts below 4.0%, raising the specter of a steep rise in inflation.

Consumers

The University of Michigan survey reports declining consumer sentiment in October, reaching lows not seen since the pandemic.

University of Michigan: Consumer Sentiment

Perceptions of current economic conditions are lower than when President Biden left office, leaving the GOP House majority at risk in the 2026 midterms.

University of Michigan: Current Economic Conditions

Consumer expectations have plunged to similar lows.

University of Michigan: Consumer Expectations

Expected price increases have moderated in recent months, but remain high at 4.6% p.a.

University of Michigan: 1-Year Inflation Expectations

Long-term expectations, likewise, are a high 3.7%, well above the Fed’s 2.0% target.

University of Michigan: 5-Year Inflation Expectations

Dollar & Gold

The US Dollar Index continues to test long-term support at 98, as shown in the weekly chart below. A breach would confirm our long-term target of 90.

Dollar Index

Gold retraced to test its new support level after reaching our target of $4,000 per ounce almost three months ahead of schedule. Escalating trade tensions with China sparked another rally, and follow-through above recent highs would signal a fresh advance, with a target of $4,250.

Spot Gold

Silver is more volatile, and tall shadows at $50 per ounce signal profit-taking and increase the likelihood of a correction.

Spot Silver

Energy

Nymex WTI Light Crude broke support at $60 per barrel in response to trade war fears.

Nymex WTI Crude

Crude prices below $60 per barrel squeeze shale producers’ margins and threaten US crude production as unproductive wells are closed. The Baker Hughes US oil rig count slipped to 418 from 422 last week.

Baker Hughes US Oil Rig Count

Base Metals

The Dow Jones Industrial Metals index ($BIM) fell sharply on the weekly chart below, warning of a correction in copper, aluminum, and other base metals, anticipating a fall in demand as the US-China trade war escalates.

Dow Jones Industrial Metals Index ($BIM)

Conclusion

Escalating geopolitical and trade tensions threaten to destabilize an already fragile global economy, with precarious fiscal debt levels and stubborn inflation. We anticipate low growth and high inflation and maintain our overweight position in gold and defensive stocks. We are underweight high-multiple technology stocks and avoid exposure to long-term bonds.

The US and China are caught in what is now known as a Thucydides trap. Ancient Greek historian Thucydides recorded the collision of an established hegemon, Athens, and a rising challenger, Sparta, and concluded that war was inevitable. Nowadays, with nuclear-armed adversaries, war seems unlikely. Instead, we will likely see a trade war with the two flexing their economic muscle to secure a dominant position in the global economic order. The US still has a strong military advantage, but China enjoys a similar advantage in industrial capacity. China presently has the upper hand because its leadership is more strategic, while President Trump is more transactional. However, the eventual outcome is uncertain, and we recommend a strong defensive posture to weather the fallout.

We expect increased fiscal spending, suppression of interest rates, and high inflation as the inevitable consequences of war.

The rise of gold and decline of US Treasuries as the global reserve asset will likely continue as tensions escalate in the decades ahead.

Acknowledgments

Posted on

A government shutdown + declining consumer confidence

Key Points

  • The US government shut down most operations on Wednesday as Congress failed to reach a deal to raise the debt ceiling.
  • Government shutdowns do not usually have a lasting effect on financial markets, but the fiercely divided House threatens a bitter standoff.
  • Declining consumer confidence and further signs of a weakening labor market will likely contribute to a slowing economy.

The Conference Board’s measure of consumer confidence declined to 94.2, remaining at 2020 pandemic levels since a steep plunge in April 2025.

Conference Board: Consumer Confidence

Labor Market

Signs of a weakening jobs market are growing, with unemployment rising above job openings in August, for the first time since April 2021.

Job Openings

Temporary employment declined to 2.5 million. Low temporary hires indicate declining employer confidence in the economic outlook.

Temporary Employment

Declining average weekly hours worked warn of increased layoffs in the months ahead.

Average Weekly Hours

A low quit rate of 1.9% reflects declining employee confidence in the job market.

Quit Rate

Stocks

The S&P 500 continues to test resistance at 6700 despite concerns over the government shutdown. A breakout would offer a medium-term target of 6900.

S&P 500

Financial Markets

High-yield spreads remain at a low 7.5%, indicating credit is readily available in financial markets.

Junk Bond Spreads

Bitcoin is more tentative, having twice tested support at 110K. A breach of the support level would warn of a sharp contraction in financial market liquidity.

Bitcoin (BTC)

Treasury Markets

10-year Treasury yields will likely retest resistance at 4.2% in the next few days, driven by uncertainty from the government shutdown. A breakout above 4.2% would offer a medium-term target of 4.4%.

10-Year Treasury Yield

Dollar & Gold

The US Dollar Index retreated below support at 98, but the outlook for lower interest rates remains uncertain.

Dollar Index

Gold climbed to $3,868 per ounce, demand fueled by the increased uncertainty. A breakout above $3,900 would signal a test of our year-end target of $4,000.

Spot Gold

Silver ripped through our target of $45 per ounce, with rising Trend Index troughs signaling strong buying pressure. A breakout above resistance at $47 would offer a target of $50.

Spot Silver

Platinum has re-joined the party, with a breakout above $1,500 offering a target of $1,700.

Platinum

Conclusion

Uncertainty over the US government shutdown has boosted demand for precious metals. Resolving partisan differences over government funding and extending healthcare benefits will likely prove difficult.

Consumer confidence is low, and a weakening labor market warns of a slowing economy. An extended shutdown would further undermine spending, pushing the economy closer to a recession.

Strong financial market liquidity supports high stock prices, but a Bitcoin retreat below 110K would warn of a contraction that would hurt equity markets.

Acknowledgments

Posted on

US Stocks Reach New Valuation Extreme

Bull/Bear Market Indicator
Stock Market Pricing Indicator

The gauge on the left indicates bull or bear market status, and the one on the right reflects stock market valuation levels. Stock market pricing indicates whether stocks are cheap or expensive relative to earnings, but it is a poor indicator of market timing. We do not recommend selling stocks because the market valuation is high, but we would advise investors to be circumspect about adding new positions without careful investigation of the underlying value.

Bull/Bear Market

The Bull/Bear indicator remains at 40%, warning of a bear market ahead.

Bull-Bear Market Indicator

The unemployment rate and continued claims are gradually rising, indicating the US economy is slowing rather than the dramatic collapse suggested by recent BLS job growth revisions.

Continued Claims & the Unemployment Rate

Stock Pricing

Stock pricing increased to a new high of 98.19 percent, compared to the April low of 95.04 percent. The extreme reading warns that stocks are at long-term 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 for 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 is at a precarious 25.4 times projected earnings, a level only exceeded during the Dotcom bubble in 2000.

S&P 500 Forward Price-Earnings Ratio

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

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