In January of 2018 we noted a cyclical leader (Semiconductor Fab Equipment) in trouble: Semi Canary Still Chirping, But He’s Gonna Croak in 2018.
We also ran a series of articles featuring the happy-go-lucky 3 Amigos (of the macro) in order to gauge a point when larger herds of investors would become aware of cyclical issues facing the global (including the US) economy. Each Amigo (SPX/Gold Ratio, Long-term Treasury yields and a flattening Yield Curve) would ride with the good times but signal an end to those good times when reaching destination (Amigos 1 & 2 got home but #3, the Yield Curve is still out there). Here is the latest Amigos status update from October: SPX/Gold, 30yr Yields and Yield Curve.
Today I would like to stick with a cyclical macro view, but do so through a lens filtered by the ultimate counter-cyclical asset, gold. As market participants, we are lost if we do not have road maps. That is why we (NFTRH) gauged Semi Equipment vs. Semi (and Tech), the unified messages of the macro Amigo indicators and many other breadth and cyclical indicators along the way to safely guide us to Q4 2018, which has been a challenge for many, but business as usual for those of us who were prepared.
But gold, which all too often gets tied up in an ‘inflation protection’ pitch by commodity bulls, is one of the best signalers of a counter-cyclical backdrop as its best characteristic is that of value retention and capital preservation. Gold, being outside the constellation of risk ‘on’ assets does not pay any income, does not leverage good economic times and does not inherently involve risk because it is a marker of stable value. Hence its under performance during cyclical good times (leverage and all) and its out performance during troubled counter-cyclical times.
So let’s take an updated look at gold vs. various cyclical items as we close out 2018, a year we began on alert (after a “bull killer” upside melt up played out in January), forecast and managed a summer upside grind to test the top (typical of markets, SPXwent higher than originally expected) and rode with the Amigos to a blessed Q4 crack in the macro.
These charts are not meant to imply an outcome for 2019, as we have a few viable scenarios for stocks, precious metals and markets in general (to be refined based on incoming information). The charts are simply a snapshot of today, for you (assuming you, like me, depend on such macro indicators) to gauge the macro. Let’s use weekly charts to get a more filtered, less noisy view of the proceedings.
SPX/Gold (AKA Amigo #1) has dropped right into the area that was originally expected to provide support. This was actually equivalent to the anticipated ‘take back’ of the entire Trump rally from Q4 2016. Many indicators and nominal markets/sectors have already taken back the rally, while the nominal S&P 500 has not (yet) quite gotten there.