One of the best questions I got asked this week was how I can be long gold and long semiconductors at the same time?
Simple answer.
We love to take a position based on the macro which is why gold has been so compelling.
Nonetheless, the algorithms have also added up for semiconductors.
Plus, the algos finally followed the macro analysis and told us to buy gold.
So, it’s always a combination of art and math, with risk parameters the constant feature for both.
The market is in a very interesting spot right now.
3 ratios are telling us 3 different stories.
The first ratio is the one between long bonds (TLT) and the S&P 500 (SPY).
With long bonds outperforming the SPY, the calls for recession are all around.
However, the softening of the yields also signals more QE and emboldens the growth stocks.
And this is in the face of another rate hike by the Fed this past week.
Wait, there’s more..
The next ratio is the one between silver and gold.
Silver is outperforming gold, which is inflationary.
Since it also means that silver, a more industrial metal, is good for the economy, it implies that there will not be a recession on the horizon.
Meanwhile, if silver continues to outperform, it also means demand for the metal is rising while supply may not be (hence the ratio). That means inflationary.
Add the TLT:SPY and the SLV:GLD ratios together, and you can see why this is such a hard macro environment to figure out.
And why we love the math.
So far, recession and inflation at the same time, still means stagflation.
And then there is the dollar.
Although historically the dollar rising and gold rising have been known to happen simultaneously, we are looking at the dollar to the Euro for clues.
The dollar typically goes up when interest rates do.
But this past week, the dollar closed lower WoW.
Is the dollar sniffing a pause by the Fed? A currency crisis?
An anticlimactic end to the banking issues with government rescues?
If any of those scenarios come to pass, it will continue to be great for semiconductors.
And can still be bullish for gold and inflation.
At 1.08, the dollar is nearly at par with the Euro.
Hence this coming week, we will continue to watch what the bonds (closed unchanged WoW) do versus the SPY (closed higher WoW).
We will see if silver’s performance (closed higher WoW) remains dominant over gold’s ((closed unchanged WoW) performance.
And, with news (on the backburner)) about Iran, Russia, and China still a thing, we will watch the dollar and how it performs against the Euro.
Any major continuation or shift in these 3 key ratios, should help us see not only the macro (more of an art) but also the sector strength (more about science).
One thing nobody can deny-the resiliency of the indices in the face of the persistent trading range.
Stock Market ETFs Trading Analysis & Summary:
S&P 500 (SPY) Could be the start of shallower rallies, needs to clear 400 and hold 390
Russell 2000 (IWM) 170 held-so maybe the ratios are implying no recession after all
Dow (DIA) 325 key to clear
Nasdaq (QQQ) Still needs to clear the Feb high. 305 support 320 resistance
Regional banks (KRE) 35 support 44 resistance
Semiconductors (SMH) Could be the start of a key reversal w/ 250 support
Transportation (IYT) A weekly close under 219 so watch here for this week
Biotechnology (IBB) Held key support at 125 area
Retail (XRT) Granny held 60-still in the game-especially since that is the January calendar range low.
Twitter: @marketminute
The author may have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not represent the views or opinions of any other person or entity.
