NFTRH is a 100% Independent Research and Strategy Based Market Service, Effectively Managing All Market Conditions and a Multitude of Sectors  In the last eLetter (May 6) we noted the negative signal in the Gold/Silver ratio and indeed it and its partner in liquidity destruction, the US dollar, did a good job of scaring everyone out of the markets in the face of the hawking Fed.
Recently a new game plan has emerged. After charting nominal silver and the Silver/Gold ratio, NFTRH 707 continued to cobble a strategy for the times, both short and longer-term. NFTRH 707 Excerpt: A Macro Game Plan This [a down-trending Silver/Gold ratio, AKA SGR] is not necessarily a negative for commodities or precious metals because the SGR would rise with inflationary pressures. At least that is its normal suit. The macro markets have been heavily disturbed by inflation fears and the resulting tardy but hawking Fed. With this relief in bonds and inflation signals the stuff that got hammered as the Fed hawked could find temporary relief if/as the macro swings disinflationary. See Friday’s public post for more on this.
But NFTRH is not a gold stock rag. It is not a commodities/resources promoter. It is not strictly an indicator nerd outfit. It is a ‘get the macro right or die trying’ service.
So the downtrending SGR is consistent with the recent fade in inflationary signaling in other areas. The rough plan as I see it now - assuming that the broad relief bounce continues from its current ‘mini’ status - is as follows.
Stage 1: The Fed was late to start hawking the markets. We proved that by demanding they get their ass in gear months ago using bond market indicators like the 30yr yield Continuum, which was banging its EMA limiters. If there was to be relief from this terrible inflationary signaling our objective was for the 30yr yield not to make a higher high to November, 2018. It failed to do so before reversing back downward this month.
We also used the 3 month T-bill yield to show the tardy Fed in a more acute view. Traditionally, the Fed does not let the T-bill get away from it, but this Fed did as it held out past the very last moment before starting its steroidal hawk routine. The blue extension to the Fed Funds rate shows the current level, near but not yet to the T-bill.
The wise guys over at CME - whose job it is to be right about Fed policy - have the Fed raising by .5% in June to above the current T-bill level. Considering cooling economic and inflation signals, this could be the last rate hike and I am not so sure the Fed will not back off to only a .25% hike. If that were to happen, it could provide sentiment fuel for stock market partygoers.
Stage 2: After that hike I would not be surprised if the Fed goes back on the shelf (although CME sees another .25% in July). Notice the 2yr yield on the chart above? It’s starting to roll over from our projection of a lower high (a companion to the 30yr yield’s lower high to the 2018 high).
This fade in inflation signalers is being happily perceived by relieved markets as a Goldilocks situation. ‘Woo hoo! The Fed is gonna back off! Happy days are here again!’
So as the ‘inflation trade’ stuff gets relief I’d also think about Tech and Growth stocks finding relief if/as the market continues to perceive relief from the inflation demon that has terrorized it thus far in 2022 and the tardy but now hawking Fed.
Stage 3A: A transition from inflated boom to a bust as yield curves steepen and nominal yields continue to pull back. Here is where Tech and Growth could out-perform but that out performance would likely mean less downside than the inflated stuff (commodities, resources, etc.). If we are making a turn here and it is not just an interim thing before the next inflationary phase, Goldilocks would get eaten by the biggest, hungriest bear… after he finishes dining on ‘commodity super cycle’ promoters.
Stage 3B: The above (3A), a deflationary resolution as the yield curve steepens, is the logical extension of where we are at now. But what if we go into uncharted territory? Well, the Continuum on page 5 is already in uncharted territory breaking a trend that goes back to the 1980s when Paul Volcker slew inflation by raising interest rates as high as the bond market then demanded. So it could well be a marker, a scout for a future new trend in yields (up) and bonds (down). But for now the yield was repelled as expected at the lower high to 2018.
Bottom Line
We are on a relief rally that came from over-bearish sentiment extremes. Inflation signals are starting to fade even as the Fed plays catch-up with its funds rate. Whether to a ‘mini’ degree (SPX has already rallied for 5 days after making the hammer reversal we noted in NFTRH 706) or something more extended, markets are on a relief rally from terribly fearful sentiment with a potential new tout about a softening Fed. Such pleasantries are unlikely to endure as the next phase would be a bust under deflationary pressure (favored) or an intensifying inflation (less favored, but certainly viable, given the Continuum’s break above the limiting moving averages). “Thank you for the great work!” -Xin L 4.14.22 The NFTRH service features a detailed weekly macro report (including stock charts/highlights galore), formal interim updates as needed, and dynamic in-day updating (NFTRH+, which includes trade setups) along with trade transactions and notes at the Trade Log, where less formal notes are posted as events dictate. This offer is through PayPal only. For regular monthly or yearly subscriptions by credit card see below.
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