Spotting the next trend

[tommor]

I very much agree, avoiding getting hit by a sudden price reversal due to a world event can be largely avoided by being on the right side of the trend. Most geo-political news does not emerge from a vacuum, and the markets pay attention to these things night and day, which we just can’t do. The result is they telegraph their analysis to us by moving price up or down. When was the last time that a country with a booming economy and sky-rocketing currency suffered a coup?

One other thing for traders to be aware of, almost no geo-political news emerging over weekends is good. Weekend news events are unplanned, nobody in power plans to release their latest good news story on a Saturday afternoon, so most weekend news is bad.

[Dollar_McGavin]

What do muni bonds have to do with gold & silver?

Welcome to another episode of Dollar McGavin’s mental madness. If my last update didn’t drive you off the deep end, this one will surely send you to the loony bin.

(Apologies for the dark humor, but I need it to keep me sane from the disaster I see coming)

Here is a weekly chart of the MUB muni bonds ETF. Muni bonds tried to recover from the COVID lows when the Fed bought them outright to support municipalities. Since the Fed stopped buying and inflation kicked in from the 1st leg of the commodities bull run, muni bonds have deteriorated. Junk bonds are not far behind.

Bonds are used as collateral for interbank transactions and loans, they make up a large portion of the foundation for the global banking network. To a bank, when the value of a collateralized asset can no longer cover its transaction liability, it is the equivalent of a margin call in trading.

The chart suggests that we are headed towards darker times. The latest rally was supposed to be a recovery rally which ended in a double top and now looks to be rolling over. The funny little labels in the charts is actually a proprietary indicator that measures and collects the price swing data in time and magnitude. The rectangle area is a statistical extrapolation (70% probability) of where the current down swing is expected to bottom, blue shaded area if it was a bullish pullback or red shaded area if its a bearish impulse wave. The current downswing is targeting the red shaded area.

In other words, if this market continues to behave (price swings) as it has always done, there is a 70% chance that the current price swing bottoms in that red shaded rectangle, the same levels that led to Fed interventions and bank collapses in previous years. BTW, some banks never recovered from the GFC and others look extremely vulnerable.

And whenever the money unit (currency) and banks are called into doubt, there is an exodus into gold & silver. IMO, the institutions and the big players have already sensed this and it’s reflected not only in the current gold & silver bull run, but can be seen in the global risk on markets, such as equity indices, financial sector and banks stocks showing signs of topping and rolling over.

BTW, it would give me no pleasure or ego boost to be proven right because the 2nd and 3rd order effects will be horrible and a lot of people around the world will be much worse off. Personal feelings and emotions aside, I just go where the charts analysis takes me.

[Laylatrade]

yeah! it was a great discussion with you.

[Dollar_McGavin]

Palladium and platinum, the other half of the precious metals complex, look like they’ve hammered in mega bottoms and are breaking out to join gold & silver.

Weekly chart of palladium:

This is a monthly chart of platinum, after a decade long bear market, IMO, this is the 2nd cheapest asset (behind silver) on the planet. The yellow moving average has a length of 60 months (5 years) and is turning higher indicating bullish long term momentum. At this scale, these things turn slowly, but once they get going they’re unstoppable for years.

[Dollar_McGavin]

This thread is turning into a journal, which wasn’t my intention. I’ll keep updating until we see either a strong move down in risk assets and/or a strong move up in commodities.

On Friday, silver made a weekly close inside the parallel channel so no parabolic move yet. We know its coming as it does in every precious metals bull market, we just don’t know when. Right now it looks like it’s catching its breath to make another try this week, let’s see what happens.

In the meantime, the US Dollar index is the most important chart to watch in my opinion. It is the lynchpin to virtually all other markets. This is a monthly chart going back to 2009, the Global Financial Crisis and the beginning of the ZIRP environment.

The USD strengthening since 2009 has drawn a lot of foreign capital into US assets: equities, bonds, real estate and more. This has resulted (together with other factors such as ZIRP) in the biggest and longest equities bull market in US history.

Once nominal gains in US assets no longer offset the USD depreciation vs other currencies + hedging costs, look for foreign capital to make for the exit. Roughly 30% of the market cap in US equities is held by foreign investors. Essentially a rollover in the USD means a rollover in US assets as well as global risk assets. This can be seen in the stagnation of global equities indices around the world: Sensex, Nikkei, STOXX600, EU50, FTSE100, DAX, HSI, KOSPI and more.

I expect the USD/DXY to head down to the 2009 lows, possibly even lower. Why? Because the US has the most debt to deleverage and the USD will be the release valve. The math says, negative real rates are in the cards = inflation will run very hot. The markets now look to be pricing in a stagflationary environment = financial/risk assets down + hard assets (commodities) up.

The prime beneficiary will be commodities, energy and precious metals, which have already initiated their respect secular bull trends. While the USD / DXY looks to be breaking down into a secular decline, the Bloomberg Commodity Index looks to be on the verge of breaking out into the next leg higher:

Let’s watch and see how things unfold.

[Dollar_McGavin]

One more thing to add here is that even though the markets are waiting on the US election, the secular trends have already started. The charts have already signaled what’s to come:

1. gold bottomed in 2015
2. commodities bottomed in 2020
3. the US Dollar index topped in 2022
4. non-US global equities looked to have topped earlier this year
5. US equities on the verge of topping and rolling over now

[Dollar_McGavin]

European banks and the vulnerable financial sector

Many banks never completely recovered following the global financial crisis. Considering that we’ve had a global ZIRP environment which devalued most major currencies, this alone should have been enough to lift stock prices. But for many financial institutions, this isn’t the case.

The interesting thing with banks is that most people’s understanding of how banks work today is terribly outdated. Banks have virtually free reign to create as much “money” out of thin air as they like and a license to expand their balance sheets at will, the only thing that limits them are their own risk models & management. The global banking industry thus can be seen as a very complex daisy chain or network of liabilities between each other. This daisy chain network is so complex and so opaque that there is no way for any bank much less regulators to calculate the sheer scale of liabilities and true risk to the entire global banking system.

Simple example: Bank A creates “money” (assets to add to their balance sheet) out of thin air to lend to bank B which does the same with bank C, which does the same to bank D, which does the same to bank A + bank B + bank E and bank F. All of these banks of course do commercial and retail business as well, but they only know the risks to their own balance sheets, they have no idea what risks other banks are carrying or what the total risk in the global banking network looks like.

So when one of the banks gets into trouble for whatever bad / risky deals they made and is unable to meet its liabilities to the others, that’s when we see contagion spread very very quickly to virtually all banks around the world.

Here are 4 vulnerable banks that may be the epicenter of the next banking crisis. The following are linear monthly charts going back to 2009 of major European banks that never recovered post GFC.

French bank Société Générale:

Spanish Banco Bilbao:

German Commerzbank:

And the German behemoth Deutsche Bank

There are several Japanese (remember the JPY carry trade unwind?) and American banks & financial institutions as well but I’ll leave it here for now.

[Dollar_McGavin]

Happy Sunday morning everyone!

Just thought I’d add an update from my normal weekend analysis.

I find it fascinating how price charts can sometimes read like a novel. And these tell an interesting tale. First look at the Bloomberg commodities and Muni bond charts posted earlier in the thread. Then take a look at junk bonds below. Junk bonds are a proxy for corporate credit risk. A healthy corporate credit market is the backbone of a healthy growing economy.

Rising commodity prices drive inflation and inflation is bond market kryptonite. This is clearly illustrated when you look at commodities and bonds side by side. Now as commodities look like they’re headed into a 2nd leg higher, muni and junk bonds look like they are headed much lower. This will drive up financing costs for businesses, which is not good for equities nor the broader economy. And just like Muni bonds, junk bonds are not far above their COVID lows and if this market continues to behave as it always has, there is a 70% chance that the current wave down will bottom in the red shaded area, well below previous crisis levels.

This looks to be impacting risk markets, let’s start with the poster child for the current AI boom: Semiconductors. They seem to be in the process of forming a head & shoulders pattern that is falling out of the longer term uptrend channel going back to Oct 2022. Price will need to make a quick move through and hold the red moving average to avoid completing the H&S formation which is targeting the $130 level, ~40% drop from the current price.

It also looks to be impacting the broader US equities markets. First the S&P500, where price has fallen out of a shorter term uptrend channel, which looks to be cascading into falling out of a longer term uptrend channel:

And then the Nasdaq100, which tends to lead the S&P500 has so far failed to get back in and stay inside its longer term uptrend channel. It now looks like it’s leading the downside.

This is global as can be seen in European and UK equities. Unlike US equities where the strong USD (DXY) attracted a lot of foreign capital, the European and UK markets traded mostly sideways since Q2. The Euro Stoxx 50 seems to have run out of upward momentum and has decisively broken out of the intermediate term uptrend channel and down through its 10, 50 and 200 daily moving averages that have clustered together, suggesting longer term decline.

The UK FTSE100 has been trading sideways since hitting ATHs in May, suggesting distribution phase and has fallen out of its intermediate term upward channel going back to Aug 2023.

And the same for the Japanese Nikkei, where price has fallen out of its longer term upward channel going back to 2022, suggesting the JPY carry trade unwind may have just been a prelude to what’s coming.

While US elections will have some short term impact on the markets, these tectonic plates have been in motion for quite some time. The next few weeks and months will be volatile enough to blow up hedge funds, pension funds, the global banking sector as well as margin calls in risk assets. Precious metals and commodities will be the main beneficiaries, but may initially go down with the other markets as margin calls may force liquidation to cover losses elsewhere.

No one has a crystal ball to foresee how or in which order things will unfold but the overall direction is quite clear, in my opinion.

Let’s watch and see how the next few weeks play out.

[Dollar_McGavin]

When there are strong market movements, I always find it helpful to zoom out and look at the bigger picture. While all eyes were on the jump in the US equities markets post election results, the more interesting part is what wasn’t talked about. For example the Fed has started a rate cutting cycle, what happened during the 2 previous bull markets when the Fed started cutting rates? The charts speak for themselves:

Also looking under the surface, which sectors benefitted the most last week? It certainly wasn’t the semiconductors and technology, the 2 leading sectors of the 15-year long bull market. Sure they went up but neither made new ATH highs to match the equity indices and the SOXX ETF has a ways to go before negating the H&S formation:

Surprisingly, the sectors that shot up the most was finance (+6%) and banking (+12%). Really? Are these really going to be the new driving force to lead the US economy higher? Has commercial real estate and bonds (major foundational pillars) made a miraculous recovery? The bond charts posted in earlier replies and this real estate ETF look more like they’ve started intermediate term declines:

A rising tide lifts all boats, so if the financial and banking sectors are the rising tide, then someone forgot to tell Citigroup (down 85% since 2006) and AIG (down ~95% since 2007), which both haven’t had much of a recovery even after 15 years.

What’s really interesting is while US indices went to new ATHs, nearly every other equity index looks to be breaking down, here’s one example:

Also of note is that while US banks gapped up nearly 12%, European banks tried to spike up higher but then were driven down, as was the case for major French bank BNP Paribas:

Are we in the midst of a new renaissance period in US banking and finance or could this be market makers sensing upcoming volatility trying to suck in HFT algos and short term momentum capital in order to re-position their books?

Gold and silver also had a pullback that looks to be finding short term support. Question is whether this is a short term pullback or an intermediate term one, odds are it’s the former but we won’t know for sure until we get more clues.

Should be a very interesting week ahead.

[Elliotrades08]

This is an interesting take! Spotting shifts in speculative capital can indeed be powerful for identifying trends. Silver, with its relative underappreciation compared to AI-driven sectors, could be primed for a move, especially with macro factors like inflation and global debt. It’ll be fascinating to see how this plays out!

[Dollar_McGavin]

Happy Monday morning, everyone!

Let’s jump right into the latest action in the Nasdaq 100 with a daily chart, where it looks like a trap was sprung on the bulls into a marginal ATH:

On a weekly chart of the SOXX Semiconductors ETF, price failed to hold the red moving average (see previous SOXX update) and made a decisive move down to continue driving an intermediate term H&S pattern formation:

I posted a Microsoft chart and comments in another thread:

There goes microsoft

Good call there mate! My analysis says the same and not only MSFT but Apple, Google, Meta, Health Care, Real Estate and more, basically a broader decline in risk assets. I often find that combining different classes of indicators (trendlines + Support/Resistance + moving averages + oscillators) with differing TA theories (Elliot waves + cycles theory) can help eliminate a lot of uncertainty. [MSFT_2024-11-16_16-03-39] For example in the chart above, price fell out of the long term u…

In addition to MSFT, this daily chart of Apple shows a marginal ATH / double top with the action now below the yellow intermediate term SMA and not too far above a vital support area:

In addition to semiconductors, healthcare has been one of the better performing sectors during this long term bull, but looks now to have a made a strong move down decisively shifting the short, intermediate and long term momentum downwards:

In previous updates, I brought up banks. The chart below shows the high correlation between the real estate sector and regional banks:

And if we take a closer look at the action in real estate, we can imagine what it will mean for regional banks:

Going abroad to Japan, please see the Nikkei big picture weekly chart in an earlier update which shows a potential H&S pattern formation. In this daily chart below, we’ll take a closer look at the “right shoulder” currently in formation, which seems to have made a lower high. The red SMA turning down and a break through the yellow SMA and dashed support floor will give a final confirmation:

The Indian Sensex has been the 2nd best performing stock index behind the Nasdaq 100. No doubt that it is in bubble territory. We see not only a lower low but also the intermediate term yellow SMA turn down confirming that the recent ATH was the intermediate cycle high. With most global central banks now in rate cutting cycles, this strongly suggests that it was the bubble blow off top for this long term bull.

Right now, there are so many areas that have either already started or are on the verge of breaking down that any one of them could start a chain reaction across risk assets. Again, it’s impossible to say in which order it will happen, but it’s also impossible to ignore the dominoes lining up near the edge.

[ausguyforex]

Buy ethereum and Bitcoin

[Dollar_McGavin]

Happy Sunday afternoon to my fellow traders!

JPY Carry Trade - what’s driving it?

In short, it’s the Japanese fiscal time bomb. With a government debt to GDP at an eye-watering 255%, the JP government need low interest rates to avoid defaulting. This has forced the BoJ to keep rates at artificially low levels, so low in fact that they are below inflation, i.e. negative real rates:

As a result the Japanese government bond market has become dysfunctional, with the BoJ being the largest holder of JP government bonds. Bond investors, banks and financial institutions (unlike speculators) will avoid buying bonds at negative real rates and therefore look for yield and better returns in other asset classes (both domestically and abroad) during risk on conditions. However when conditions change to a risk off environment all that capital gets repatriated all at once resulting in major volatility across global markets, this is the unwind.

Nikkei update: We continue to observe the price action in the “right shoulder”, which has now fallen out of the intermediate up channel and turned down the red SMA confirming a lower high and increasing the odds we soon see a lower low below the yellow support level:

Which asset thrives during negative real rates?
Gold has made ATHs this month vs EUR, JPY, GBP, SEK and CHF. These 5 currencies make up 91% of the US Dollar Index (DXY).

The USD and CAD which appreciated this month vs gold have very high government and household debts, where like Japan we can expect negative real rates in the future to add more fuel to the ongoing gold bull.

US Junk Bonds Update
Junk bonds and equities tend to top and bottom in sync. In the weekly chart, we can expect the red SMA to confirm an intermediate top this week and a price decline over the coming months. An average intermediate decline from current levels will cascade into a long term decline similar to the decline in 2022.

Zooming in on a daily chart, we can see that price has fallen out of the upward channel and is being squeezed between the short term red SMA and intermediate yellow SMA. High probability that price breaks to the downside this week.

Nasda100 update:
And a downward move in junk bonds means high probability of a downward move in equities. In the Nasdaq 100 daily chart below, the benign sideways price action has given the red SMA time to flatten out. And unless we see very strong bullish price action at the beginning of the week, the red SMA will turn down and confirm the bull trap as a short term and intermediate term top. The Fed rate cutting cycle suggests high probability of this top being the long term top:

Semiconductors update
Last week the red SMA in the weekly chart turned down and confirmed the “right shoulder” top. High probability we now see this sector roll over.

BTC & ETH - the other speculative asset
I am by no means an expert on BTC or cryptocurrencies in general. However, there is something different with the current bull run, can you see it?

What’s different is that ETH and the broader blockchain sector didn’t join BTC into ATHs, with one exception, the LEGR Blockchain ETF. Let’s take a closer look:

The LEGR chart above highlights price falling out of the intermediate term upward sloping channel, a negative short term divergence between price and the red SMA. Price needs to hold the yellow SMA and dashed support level in order to avoid breaking down.

And finally ETH which usually leads BTC both to the upside and downside, may still join BTC into ATHs but has some resistance to overcome:

For over a decade BTC has had a positive correlation with the Nasdaq100 and tech stocks. IMO, the real test for the current BTC bull run is whether it can defy previous behavior and continue higher while the Nasdaq 100 and tech stocks decline.

This week could see some major fireworks with a lot of speculative capital at risk. Looking forward to see how the week unfolds.

[Dollar_McGavin]

Good day fellow traders! Hope you’re all doing well!

Gold at an inflection point - is it going parabolic?
Gold will need to make a decision and soon about whether it’s going parabolic now or later.

Make no mistake that gold is in a long term uptrend with very strong momentum and there will eventually be a parabolic phase. The question is whether it already is in the parabolic phase or do we need to wait for an intermediate term move down first before going parabolic.

The chart below shows 2 different potential paths. The current intermediate up trend has run twice as long as the statistical average telling us it’s in a strong run, but it’s now decision time.

If it takes the blue path and breaks below the blue support level, then expect an intermediate term move down before going parabolic. If price takes the yellow path and breaks through the yellow resistance level then it’s time to buckle up.

A sure sign would be to see silver take the lead and slingshot past gold. Silver moves much faster and more dynamically than gold, but gold is the decision maker, there is no bull trend in silver unless gold says so.

Capital outflow from Semiconductors and Tech to fuel commodities bull

As I mentioned at the beginning of the thread, in order for precious metals and commodities in general to move much higher it needs an influx of capital. And I believe it will come from the semiconductor and technology sectors, both of which are looking very ripe for rolling over.

Please refer to the latest update of the SOXX weekly chart earlier in the thread illustrating the head and shoulders pattern that has been forming this year. Then look at the daily chart below:

I’m expecting the intermediate term yellow SMA to cross below the long term blue SMA this week. That will be a confirmation of a new long term bear market.

While Semiconductors are on the verge of a long term bear market, tech stocks not far behind being on the verge of an intermediate term downtrend with a high probability of it cascading into a long term bear market.

And once semiconductors and tech stocks go, then I expect the broader equity indices across the globe to follow, please refer to these charts in earlier updates.

The real panic selling will occur once the banks go, this I believe will cause panic buying in hard assets as investors look to get out of financial assets and depreciating fiat.

First Japanese banks, which looked like they were going to implode with the JPY carry trade unwind. It wouldn’t surprise me if the current run up was an official BoJ intervention to buy the banks a little more time to get their balance sheets in order.

The European banks look very similar to the tech stocks in that they are on the verge of heading into an intermediate term downtrend which with high probability cascade into a long term bear market:

Another interesting week ahead

[Dollar_McGavin]

Happy Sunday evening everyone!

Why do I look at so many different markets? To paraphrase boxers:

It’s the punches you don’t see that hurt the most

The reason I do this is to see capital flow and to understand why. Capital doesn’t stand still, it’s in continuous motion. My job as an investor / trader is to ignore the hype and know which the capital is flowing in order to get ahead of the big moves.

While everyone is focused on new ATHs in US equities and BTC hitting $100K, I usually prefer to take a deeper look behind the façade.

Since the end of September, capital has been flowing into USD denominated assets, namely US equities, tech stocks and crypto as illustrated in the DXY:

Yes, even crypto is attracting foreign currency as shown by the positive correlation with DXY this year:

Going by the 2 charts above plus the ATHs in the US indices and crypto, we can conclude several observations:

1. Foreign investors are a major driving force behind the current trends since end of Sept
2. Investors are treating crypto (including bitcoin) as risk / speculative assets
3. A repatriation of foreign capital will most likely trigger a major downturn in US equities and crypto

So the question then becomes, what could trigger a repatriation of foreign capital? In other words, what is the punch that most won’t see coming?

1. The first we already mentioned, if the USD depreciates vs other currencies (DXY rolling over)
2. Global economic shock or downturn due to bankruptcies, real estate or banking crisis or geopolitical event
3. Rollover in Non-US financial markets, requiring liquidity to cover losses or margin calls
4. Rollover in US risk markets such as semiconductors

This means that the current trends are only as strong as the weakest link. It’s impossible to say where the initial domino will fall, but US Real Estate, Semiconductors, European equities, the Nikkei 225 and Japanese banks certainly are strong candidates.

US Real Estate

First an update of the US real estate market that is showing signs of an intermediate top:

Nikkei 225

The massive downward spike that’s been attributed to the JPY carry trade unwind broke several major technical levels and was the first signal of an impending long term (2+ years) bear market. It looks like we may get the 2nd signal soon with the yellow intermediate term SMA turning down this week confirming a lower intermediate high made on Oct 15th.

European Stocks

European and UK equities are basically going sideways and showing strong signs of distribution:

And finally, one place where capital is not flowing is semiconductors… remember those?

One clear sign will be an upturn in US Treasuries as investors rush to the “safety of this risk-free asset”:

At the risk of repeating myself, the markets have already confirmed the beginning of a secular bull market in commodities. The precious metals sector have also started their long term bull markets. What I’m looking for are signs of the parabolic phase as I believe the capital driving force will come from these risk markets that I’ve been posting about.

Seems only a matter of time…tick tock…tick tock…

[Dollar_McGavin]

Good evening fellow traders. hope you’re all having a festive weekend!

Ok, the number of signs pointing to an impending risk assets bubble burst are piling up.

SOXX
Let’s start with a semiconductors update, which looks to be hanging on for dear life:

Notice how the price is hugging the yellow intermediate term SMA. I’ve also added the Yearly Cycle Trendline. This is part of Cycle Theory which is too complex to explain in a forum, but a break below this trendline (which we got last week) means that the ATH @ $267.24 was the top for this multi-year bull run. The only way to negate this is a new ATH. In any case, price is now getting squeezed between the red and yellow SMA and will need to make a decision soon.

NVDIA
And now NVDIA looks to be joining the rest of the semiconductor space:

Price is not only falling out of the long term uptrend channel going back to Oct’22 but looks to have also broken the Yearly Cycle Trendline and has made a marginal lower low. NVDA needs to make a new ATH and quickly to keep this bull run in tact.

Healthcare
Healthcare has been a go to sector for many investors during this bull run. It’s also the first US sector to roll over into a multi-year bear market:

I suspect that the other sectors are not too far behind. Two things that can push the other sectors over the edge are the financial sector and financial assets.

US Banks
Major US banks look like they just made a classic 3 gap blow off top & reversal. All the tell tale signs are there with a breakout gap, multiple mid / runaway gaps and an exhaustion gap. The blow off top is marked by an attempted breakout above the top line of the upward parallel channel which then failed and aborted back below that same top line.

As I mentioned in a previous post, considering all of the problems in the Real Estate sector, this looks to be a manufactured move by market makers & institutions to re-position order books and liquidate preferred clients.

Now let’s cross the Atlantic and take a look at the 2 largest banks in Europe (as measured by AUM).

BNP Paribas
Europe’s largest bank looks like it’s rolling over:

Crédit Agricole Group
And Europe’s 2nd largest bank looks very similar:

And now back to the US financial sector and a major player in the insurance space.

AIG
AIG never recovered after shares lost ~95% of their value in the GFC fallout and now looks to be in trouble again:

Real Estate
And speaking of Real Estate, the sector continues to deteriorate and we may see it pick up downside momentum this week:

Junk Bonds
These financial assets are the backbone of the corporate credit market. They are in a multi-year bear market but have been in a pullback since Oct’23. They now look to be rolling over. If these bonds don’t make a new high soon, the downside volatility will be brutal as the yearly cycle aligns with the multi-year cycle:

Municipal Bonds
It’s a pivotal moment for Muni bonds. Here’s an update to the weekly chart I posted earlier in the thread. There’s a lot of information here, but it’s needed to illustrate what I’m seeing.

The most important thing to understand here is to look at the 2 Yearly Cycle lows and see the strong trends that they produce as shown by the yellow arrows. Now the yellow SMA is saying that this market is in a Yearly Cycle advance, but it’s been very weak so far. We would expect a fresh Yearly Cycle advance to blow through that yellow dashed resistance level overhead. However the current price action is saying that the more probable move is break of the yellow support level targeting the red shaded area, this would make a lower low and confirm that the Yearly Cycle has topped and entered a Yearly Cycle decline.

Gold
Finally, what does all this mean for gold?

As I wrote 2 weeks ago, gold needed to make a decision whether it’s already in the parabolic phase or if it needs another leg down first:

The spot market still looks undecided. The futures market however looks like it’s making a cautious move higher:

The futures market is more aligned with risk assets rolling over but we never take anything for granted and await further confirmation this week.

[Dollar_McGavin]

Happy Sunday evening everyone, hope you’re all getting some time off for the holidays

I started this thread 2 months ago to show that trend changes can be spotted way before they happen. As we are in the middle of a secular trend change, not all market participants will see the trend shift at once. Some see it happening very early, others a bit later which makes it a gradual process. And of course some don’t see it coming until it runs them over. This past week there were several markets that joined the US Healthcare sector into a multi-year bear market.

Junk bonds - The financial foundation for the US equities bull is crumbling
Junk bonds entered a multi-year bear market.

Municipal Bonds
Here’s an update of the weekly Muni bonds chart, look at the last 2 candles. Gains accumulated over several months wiped out in 2 weeks. That’s what the start of a yearly cycle decline looks like.

As financial assets go, so go the riskier assets. The big players are aware of the charts above and have already positioned themselves accordingly.

Semiconductors
An update to the weekly SOXX chart. Two weeks ago the SOXX ETF was being squeezed between the intermediate cycle red SMA and the long term (yearly cycle) yellow SMA and needed to make a decision. And last week it decided to fake a move above the red SMA before breaking and closing below the yellow.

A break of the yellow support level @ $211.21 would be final confirmation.

NVDA continues to breakdown
As expected NVDA broke below the yellow intermediate cycle SMA. As I wrote last week, NVDA broke below the Yearly Cycle Trendline and fell out of the multi-year uptrend channel. Unless it makes a new ATH quickly, it will join the rest of the semiconductor space and other sectors in a multi-year bear market.

US Industrial sector enters a multi-year bear market

US Real Estate and Commercial Real Estate rollover into a multi-year bear market

US Major Banks
Let’s check in on US banks, where price fell through that massive post US elections gap.

Now let’s take a look at the 2 largest financial market bubbles in world.

India’s Sensex - the 2nd largest equities bubble
It looks like the 2nd largest equities bubble in the world is bursting with that strong move down last week.

Of course this market can keep the bubble in tact by making a new ATH, but highly unlikely as risk markets everywhere are rolling over.

Nasdaq100

Nasdaq100 doesn’t exhibit the clear cut signs shown in the other charts but we shouldn’t expect that from the strongest performing index. What is clear however is that bearish weekly candle right where we would statistically expect the intermediate cycle to top out. And if it does turn out to be the intermediate top then look what’s waiting below, the long term upward parallel channel bottom and the Yearly Cycle Trendline both of which are at risk of being broken through. As this is the strongest performing risk market, we can expect it to be the last to break.

US Dollar Index
As stated several times before, the strong USD has attracted a lot of foreign capital into US assets. Around 30% of the US equities market cap is made up of foreign capital which can vanish very quickly when DXY (or any major risk market) rolls over. After 3 months in a strong uptrend, I’m expecting this intermediate cycle to top out and roll over any day now. The daily bearish candle right in the timing band for an intermediate cycle high is a first signal.

Gold futures ready to turn higher
This is a very short term chart (1 hour) but gold (as well as silver) futures look like they’ve made a bottom and are ready to turn higher.

This week will be a short trading week in holiday thin conditions, we could be in for some extra fireworks this year. Let’s watch and see.

Happy holidays to all who are celebrating!

[Dollar_McGavin]

Happy holidays everyone, hope you’re all getting some well-deserved time off!

Markets were quiet this week due to thin holiday conditions, so I’ll do something different this week and take the opportunity to make the case for global economic stagflation soon. Please bear with me while I go into some economic history. I’ll keep it simple but in order to know where you’re headed it’s necessary to know where you’ve been.

Why do Central Banks exist?
No serving politician or official will ever admit it, but central banks’ sole purpose for existence is to keep governments solvent—the first central bank, the Bank of England, was created specifically to manage the monarchy’s massive debt in the late 1600s.

The Fed, a private institution owned by major US banks, exists for a similar purpose and their future decisions will be dominated by the current US fiscal crisis, which economists say is in “Fiscal Dominance.” This reflects a debt burden so massive it can’t be reduced through conventional means, this has become a global issue but for simplicity’s sake, we’ll limit today’s analysis to the US.

The real cost of US govt debt
The best way to cut through all the noise is with hard numbers that are impossible to ignore and the chart below showing the US govt’s debt burden in real terms does exactly that. The US government’s debt duration averages 6.5–7 years, which unfortunately doesn’t align with future inflation expectations data at 5 & 10 years. So while using the 5 year treasury yield isn’t perfect, it’s more than good enough for our purpose.

Starting on the left, post-2008 QE programs drove real rates negative, benefiting debtors but penalizing savers, lenders and creditors. By 2016, the Fed started to raised rates and unwind QE, but the rising debt burden and bond market “illiquidity” forced the Fed to pause QT and cut rates in 2019, even before COVID, which just happened to provide a convenient political cover to drive real rates negative again. The pandemic and supply shocks ignited the secular commodities bull and inflation, forcing aggressive rate hikes in 2022, triggering bond market turmoil and amplifying the debt burden to crisis levels.

Record high tax receipts from ATHs in equities markets offered some respite in delaying the inevitable, but as the chart shows the current trajectory is unsustainable. Interest payments now exceed $1 trillion annually (the single largest govt expenditure), with federal deficits at 6% of GDP, both of which will continue to rise with bond yields.

Looking at the right side of the chart, recent rate cuts failed to alleviate the debt burden, as Fed policy influences short-term rates but not the long end of the yield curve. In the 7-yr treasury yield chart below, note that while the Fed has cut -100bps over the last 4 months of 2024, the 7yr yield has gone up by more than +100bps over the same period increasing the debt burden and federal deficits.

This brings us to where we are today. In order to reduce the debt burden going forward, there are 2 possible paths:

1. Continue as we have but where equities markets will need to go a lot higher to provide much more capital gains tax than they have so far today (resulting in yields continuing to climb higher, increasing the debt burden, collapsing the bond markets which will send yields even higher… wash, rinse, repeat) or

2. Real rates will need to go deeply negative again (massive depreciation of USD purchasing power)

Foreign indices, multiple US sectors, bond markets, commodities and the charts below are pointing to the latter. And as history has already shown when push comes to shove, the Fed will sacrifice the USD before sacrificing the bond market / US govt solvency. Yields are at dangerously high enough levels to trigger a financial or banking crisis (as shown by the bond market charts in this thread) which could provide the necessary political cover for some stealthy form of QE as well as other measures.

Or I could be completely wrong, let’s watch and see what happens!

As mentioned, markets were quiet this week so there’s only 2 charts in today’s analysis.

US Small Caps
First up the weekly chart below shows Small Caps didn’t follow the S&P500 and Nasdaq100 into new ATHs, instead this index ran into resistance at the previous 2021 high forming a double top. Note also that this market topped within the intermediate cycle timing band and has closed below the Yearly Cycle Trendline. This means the index now has very little time to make new ATHs to keep the bull market intact otherwise it will rollover into a multi-year bear market. Tick tock…

Equal weighted S&P500
All the signs are pointing to the S&P500 and Nasdaq100 bull run being held up by a handful of heavily weighted mega caps. The equal weighted S&P500, like Small Caps, also has an intermediate cycle top within its statistical timing band, has broken the Yearly Cycle Trendline and that move below the red intermediate term SMA looks very convincing. In any case, it’s now also on the clock.

We may not see much before liquidity returns to the markets on Jan 2nd.

Enjoy the rest of 2024 with your loved ones and I’ll see you in 2025!

[Dollar_McGavin]

Happy 2025, everyone!

Hope you’re all having a fantastic start to the new year.

Another week of holiday thin conditions, another fairly quiet week. Allow me to take this opportunity to make the case for an ongoing secular trend change.

The current secular trend

Let’s start with this Nasdaq monthly chart going back to the beginning of the current secular cycle, the post-2008 bottom.

The important thing to note is where price first wobbled and fell out of the secular uptrend channel in mid 2022. Now price did get back in the channel and made new ATHs, however, it’s hanging around in the lower half of the channel and one wobble is usually all any trend gets before a reversal.

So how far away is a secular trend change? For that we need to drill down to the weekly chart for some more clues:

There are several things to note on the weekly chart. The first is that the long term uptrend channel is the old school trend analysis equivalent to a yearly cycle advance in cycles theory. When price eventually falls out of the channel, it will also break the Yearly Cycle Trendline.

This is where it gets interesting. A break of the YC trendline indicates the start of a YC decline. A YC decline in the Nasdaq is on average -35% from the YC high, which in our case is also the ATH. The previous YC decline was -38%. Now look at the 2 yellow dashed lines that are -35% resp -38% from the ATH. They are both below the Secular Cycle trendline going back nearly 16 years. So, if the Nasdaq 100 continues to behave as it always has, there is a very high probability that the next intermediate cycle decline will cascade into the Yearly and Secular (multi-year) Cycle declines, i.e. secular bear market.

So how close are we to an intermediate cycle decline? Let’s drill down on the daily chart.

This week, price fell out of the intermediate term uptrend channel and is now trying to get back in. Time wise, we can expect a daily cycle / short-term bottom any day now, but once price falls out of a longer term channel the next advance is often very weak. The main take away here is that the intermediate cycle (IC) looks close to rolling over and an IC decline is on average -17%, which is well below the Yearly Cycle trendline.

The Nasdaq is signaling that a secular bear market is on the short term horizon.

But are there any other markets that can add weight to an imminent secular bear market?

Junk Bonds

Let’s take a look at a monthly chart of the junk bond market going back to the post-2008 / GFC lows. As mentioned in previous updates, junk bonds are the foundation of the corporate credit market, there is no economic nor business growth without a healthy corporate credit market.

The takeaway here is where price is forming a Yearly Cycle high. The weekly charts in previous updates show a high probability that $97.90 is a YCH, which would make it the all-time lowest YCH ever. And a YC decline from this level could be catastrophic, see the rectangular price target area with blue and red shaded areas. An average YC decline is -20%, which would take this market below the Global Financial Crisis and COVID lows where the Fed was forced to intervene and buy junk bonds outright.

In the real world, this essentially means that investors and financial institutions see business lending as very high risk. Why would they think it is high risk? Maybe because they think the world is headed towards stagflation as I highlighted in last week’s update?

And this isn’t just an American phenomenon, let’s take a look at the international junk bond market.

International Junk Bonds excluding US

This weekly chart indicates that international junk bonds are already in a secular bear market. Look at that weekly candle after price fell out of the long term uptrend channel. The final liquid trading week of 2024 wiped out all the 2024 gains taking price down to Oct 2023 levels.

Did the holiday thin conditions of the last 2 weeks prevent an even deeper market rout? Let’s watch and see.

Only a matter of time before we see the impact in the international equities indices.

Euro STOXX 50 Index

European equities look like they are in a YC decline after breaking the Yearly Cycle Trendline and struggling to stay inside the long term uptrend channel.

On average, a YC decline is -31% from the YCH (Yearly cycle high) which in our case is also the ATH. This would put price well below the even larger Multi-year Cycle Trendline, i.e. a secular bear market.

One thing to note here is that European equities aren’t in the same bubble territory as US, Indian and Japanese equities. So, even though the decline in European equities won’t be as deep, I don’t expect to see this market recover before the rest of the world.

And speaking of bubbles…

India’s SENSEX Index

The 2nd largest bubble in the world looks like it is bursting with both a break of the YC Trendline and the lower boundary of the long term uptrend channel.

An average YC decline (-38%) doesn’t imminently break the Secular Cycle Trendline, but the odds of this emerging market defying a global debt deleveraging (stagflation) is near zero, IMO.

The first liquid trading week of 2025 should be very interesting.

[Dollar_McGavin]

Happy Sunday morning everyone!

The bond markets and interest rates are sending a very strong signal: we are getting closer to something major breaking in the global financial system.

Interest rates at critical levels

Interest rates continue to climb ever higher:

Higher rates deteriorate the value of collateralized bonds risking a collateral and USD shortage, a repeat of 2008.

US govt bonds

The US treasuries market, the global reserve asset and bedrock of the global financial system, should be making G7/G20 officials very nervous.

Unfortunately for them, none of them can take any preemptive QE/ debt monetizing efforts without destroying their “economy is strong” / “soft landing” rhetoric and their credibility along with it. They know the situation, are in desperate need of inflation/currency devaluation as well as political cover (like a bank or economic crisis) to start QE / debt monetization / deleveraging.

US Banks and Financial Sector
This has hit not only US banks but also the broader financial sector:

Junk Bonds

US junk bonds continue to deteriorate:

While European, UK and Canadian junk bonds are imploding:

Muni Bonds
Muni bonds made their lowest weekly close since Nov’23 breaking a pivotal level:

US Mega Caps
The Mega Caps have finally started to react to the increasing risks and are showing signs of rolling over into Intermediate term declines which risk cascading into even larger yearly cycle declines, i.e. multi-year bear markets.

S&P500 and Nasdaq100
This can also be seen in the US indices as well. When the drop comes, the foreign capital unwind (see explanation in earlier thread updates) will not be orderly i.e. crash like downside volatility.

Secular Shift

My thesis for a long while now is that the global economy was in a debt trap headed for an inevitable deleveraging and stagflation. In my mind, the real question was when the rest of the markets would reach a similar conclusion.

With the risk off reaction to last Friday’s NFP beat (sign of a strong economy) I believe that markets have now realized this as well. Any positive economic data or hawkish Fed /CB jawboning means:

1. less chance of monetary easing
2. leading to higher rates
3. leading to further bond market turmoil
4. leading to higher bank balance sheet risk
5. leading to higher USD demand (to cover collateral shortfalls) and decline in equities
6. leading to lower business growth and tax receipts
7. leading to higher deficits and bond issuance
8. leading to higher rates….wash, rinse, repeat.

The big players have already understood this as this big picture gold vs S&P500 chart shows the ongoing secular shift out of risk assets:

And commodities are close to breaking out into a second leg higher:

I’ll be watching the Monday open in Japan and India as both of these bubble markets were closed and have yet to digest the NFP risk off reaction.

Either way, should be a very eventful week.