IN PLAY since we began this goofy metaphor last fall, the happy-go-lucky 3 Amigos would signal macro changes to come, writes Gary Tanashian in his Notes from the Rabbit Hole.
When you are talking about the macro however, things move slowly, and to date only one of our riders has made it to his destination.
- Stocks vs. Gold (the S&P500 index divided by the gold price)
- 10-year & 30-year US Treasury yields
- The 10-2yr Yield Curve (10-year yield minus the 2-year bond yield)
To review, they are Amigos 1-3, Chevy, Steve and Martin.
Amigo #1: Stocks vs. Gold
We noted Amigo #1's eyes closed as stocks vs. gold took a big plunge in early February and again in March. This has actually set a downtrend of lower highs, lower lows in 2018, and the swings have been very dynamic.
Right now we are on an up swing and if you are a gold bug and this ratio rises above the March high please prepare to take caution, as the macro would be moving against you, at least relative to risk 'on' assets. But for now the lower highs and lower lows daily trend is intact.
The big picture uptrend in SPX/Gold remains intact and our upside target is higher still, at around 2.5 which, while not shown on this chart is roughly a 38% Fib retrace from the 2011 low. We have noted that taking out the September 2017 low (shown above) would put cyclical players on notice for bad things to come. The ratio has not threatened that level. We are still cyclical and risk 'on' by this measure.
Amigo #2: Long-term Interest Rates
It has not been rocket science. Ever since we established how not to get fooled by the financial media and the hysterical news of the day, the 30-year US Treasury bond yield and its monthly EMA 100 limiter (red dashed line) have been a simple guide about when to have caution on a rising yields stance.
After all, decades of consistent history should be respected, shouldn't it?
So I ask you to please consider whether the limiter will live up to its name and limit the move in inflationary hysterics and eventually risk 'on' market activity (as far back as October 2017 we had, after all, expected stocks and interest rates to climb together to the 3.3% limiter) or become a gateway to something very new and very off-the-hook with respect to a continuation of what has been considered 'normal' for decades now.
Such a breakout may force a reevaluation upon casino patrons as to previous linear thinking about bullish and bearish bearish market forecasting. But for now, Amigo #2 has dutifully ridden to his destination along with the risk 'on' trades, which remain intact.
I am not going to pretend to lecture anyone on what will happen if it breaks through or if it is limited and fails again, for that matter (that will take ongoing management as we do in NFTRH). But changes will eventually come and they could be highly inflationary or quite the opposite, depending on which way yields go, in line with recent decades of history or on to a new trend.
Amigo #3: 10yr-2yr Yield Curve
The media continue to trumpet inversion of the yield curve as a reliable warning about recessions to come. After all, the last 2 recessions came about after the curve inverted and the media love to extrapolate easy answers.
But the actual warning comes when the curve stops flattening and begins to steepen, regardless of whether it inverts first or not. Inversion or lack thereof is more an arbitrary signal that the financial media fetishize over. It is the direction of the curve and the macro signals implied that matter.
As you can see, the Yield Curve continues to burrow ever flatter and still indicates risk 'on' for the broad markets and a cyclical up phase for the economy.
Bottom line? Amigo #1 (Stocks vs. Gold) is still intact, but under stress by daily chart. It has not yet turned macro negative.
Amigo #2 (Long-term Interest Rates) have arrived at potential limit areas, but these can dwell for months before a resumed uptrend or a failure are registered. But a condition for change, the first condition, is in play.
Amigo #3 (10yr-2yr Yield Curve) is still flattening in line with the cyclical and risk 'on' trades. While likely much closer to the trend's conclusion than to its beginning, the macro moves...Bueller? Yes...sloooowly.
While I hold open continued corrective potential in the stock market, until it and other cyclical items weaken and change trend vs. gold it is a fact that the current trend remains cyclical and risk 'on'. Even with a harsher correction than that seen so far in 2018 the stock market is leagues above any danger zone beyond a mild cyclical bear potential.
Gold and the counter-cyclical gold sector on the other hand, could be leading the indicators shown in this article by remaining firm (ie, failing to break down). But a solid fundamental backdrop has not yet engaged and will not engage until many of the trends in play post-2011 are reversed.
The Amigos need to reach their destinations and other macro indicators will need to start turning before that is the case.