Originally published by Chamber of Merchants
Market Summary
The stock market is rallying. It’s rallying big league / bigley.
However, as David Rosenberg says, ‘This is the mother of all overvalued stock markets”.
Last year, heading into December, the market was performing poorly. Uncertainty about crude etc… then, just before Christmas, when all the little boys and little girls were starting wonder if they had been good or bad, Santa came to town.
The Santa rally is the reward from the powers that be that keep us, the peasants, clinging to some hope that we can make it in the stock market. It’s the equivalent of the queen in the middle-ages tossing a few coins from the window as paupers scramble in the mud fighting each other for a morsel of shiny stuff.
Last year’s Santa rally had everyone feeling so good that they got a little ahead of themselves, drinking too much of Santa’s special punch.
The week after the Santa Rally, we experienced what has been noted as the worst January in stock market history:
Now the stock market is rallying on Trumphoria and Santa has not yet even packed his sleigh.
“Record highs” is the new slogan…
All I’m saying is that when it’s too good to be true, it usually isn’t true.
Different Time Frame
A theory that has crossed my mind is that last year’s trading is repeating a few weeks earlier. The action in gold, gold miners and the stock market all appear to be repeating their action from last year, but the time frame appears to be shifted earlier. This could be to catch the market off-guard. Santa might just change his mind and head home, kick up his feet and watch it all burn.
“Santa, you naught boy.”
Am I right? Who knows. Time will tell.
Yields , Dollars, Gold and Silver
As discussed yesterday, yields were keeping a lid on the precious metals. Yesterday, the 10 Year yield dropped from the 2.40 mar, breaking to the downside:
Now while this allowed gold to rally to $1180 last night, you can clearly see that yields are still in their trading channel. This is the point where yields will either bounce back or heading to lower support at 2.30. So the precious metals are not yet free to rally. Keep your eye on the US10Y. It’s decline allow gold to make its gains.
Gold:
This is yesterday trading box chart for Gold:
Gold rallied out of its trading box. However, in the last few hours it has retraced to test the top of the box:
For traders who are long gold, this would be the point to enter since the next stop would be around $1200 if the support holds while the dollar and bond yields continue to decline.
US Gold miners
The US gold miners gapped up and usual the attempt was to fill the gap. The gap may or may not be filled. My bet is it won’t.
What I do like is the the positive volume on the miners. Again, this is not the confirmed reversal, however, more and more boxes are being ticked. I’m already in 120% (yes…20% more than 100%) so I’m merely observing.
Dollar
The US dollar fails to rally, even though the JOLTs report may be described as outperforming by some. Keep in mind the JOLTs is still markedly lower than the previous month.
I am of the opinion that each rally in the dollar is becoming a signal for short sellers to take positions.
Am I a dollar bear? For fundamental reasons, yes. But that does not preclude the dollar from rallying on Euro weakness or any other multitude of factors.
Conclusion
Santa has me worried. Not worries per se. I’m in precious metals so I simply sit back and watch the show unfold.
However, from an economic point of view, the market continues to rally (two sectors actually), while the fundamentals are sorely lacking.
The rally which is largely based on an expected fiscal stimulus and infrastructure spending appears premature.
As awesome subscriber AM says:
“I don’t know much about finances but project development I know like the palm of my hand. It takes anything between one to two years to complete the documentation for approval of a mega-project, that phase employs architects and engineers @ 20% of the ultimate workforce. Then six months tender and award phase so the materials do not turn up until year two after design is complete for the award of early procurement items and year three is the earliest you can coin for construction workers, maybe year two for some early works. To sum up I believe the commodities rally should not start for at least two years (when procurement can commence) and the jobs for construction workers that will cause inflation a year after that, or […] three years from now. Smaller projects, schools and the like take a bit less, but the engineering industry has been decimated so a year minimum.” __ Thanks AM.
There you have it folks. If you’re partying because of Trump’s spending, you may be a little worn out by the time/year it actually happens. Also, keep in mind: Trump needs money to spend. The government usually uses tax income…but taxes are about to be reduced in the U.S.A… so where will the money come from? Deficit spending through the Federal Reserve. This is amazing for gold. In addition, the Debt Ceiling is not being mentioned at all in the media. However, come March next year, the U.S Government needs to explain why they need to extend the ceiling by another 4-5 trillion dollars and how they will repay it back (hint…they wont’). All of this will still affect the markets and gold. So Santa, please forgive me: if I see you, I might just grab my present and run while the going’s good.
Milk and cookies are in the fridge. Grab them on your way out.