Why a Financial Black Swan on the Stock Market Remains a Possibility

The records keep on falling on the stock market. Thank you, Nvidia, as the S&P 500 (SPX) soars to new highs again. But so did the other suspects like the Dow Jones Industrials (DJI), NY FANG Index, the S&P 100 (OEX), the Wilshire 5000, and the Russell 1000 and 3000. But the divergences are growing and the Dow Jones Transportations (DJT) is still nowhere near its former high.

Microsoft is now the largest company in the world supplanting Apple who falls to number 2. With a market cap over $3 trillion MSFT is almost as big as France the world’s 7^th largest economy. Nvidia is now the 4^th largest company with a market cap of almost $2 trillion. Canada with a GDP of $2.1 trillion is the world’s 10^th largest economy. Yes, NVDA almost as big as Canada.

Guess who else just made all-time highs on the stock market? The Tokyo Nikkei Dow (TNK). Yes, it took only 34 years to beat that record high seen at year end in 1989, or was it early 1990. No matter, it made it. Pop the champagne. Except that’s in nominal terms only. In inflation-adjusted terms, even at Japan’s low rate of inflation it still has a way to go.

Japan’s lost decade(s) is over. Or is it really? Our chart looks pretty good and the suspicion here is that the TNK still has room to rise further. That’s a nice uptrend in place since those lows way back in 2008–2012. If you look at the uptrend from 1982 to 1989, it was almost straight up, uninterrupted. Not this time. That’s why we believe the TNK probably has some further upside, although it is starting to spike.

As for the SPX, it most likely has a bit further to go. But the stock market is getting frothy. And that’s all they talk about on CNBC. The Ais. Back in 1999-2000 all they talked about was the dotcoms. It fits well with our thoughts that our top could be in March. The Magnificent Seven—or is it Six now—rally fits with the dot.com rally of 1995–2000 that also topped in March 2000. One just has to wonder, though, is Nvidia today’s Cisco? Many think not. Cisco later collapsed 90%. Could that befall Nvidia? Time will tell.

In looking at the chart of SPX, right now it is just going straight up almost without interruption since that low last October. The last time we saw that was from the pandemic low in March 2020 to the high in January 2022. At that time the run-up was fueled by QE4 and ultra-low zero percent interest rates.

These are two conditions that don’t exist this time. Instead, we have 5% interest rates and QT, although we’ve noted before that there appears to be backdoor fueling of the economy to keep things alive. All this is against the backdrop of two wars, although neither of the wars is impacting North America.

The U.S. economy has remained the strongest in the world. With wars on the edge of Europe and the Middle East, economic trouble in China and Japan, and higher interest rates in the U.S. than anywhere else, you have the classic setup for funds flowing out of the regions to the U.S. where the funds appear to be parked in the booming U.S. stock market. That has contributed to the strong U.S. dollar, even as interest rates have remained high.

That the stock market rally has been fueled primarily by the Magnificent Seven (or Six, if one thinks Tesla is faltering—hint: it is) seems to be beside the point. 4,900 and then 4,650/4,700 appear to be the breakdown points, with the latter signaling that the rally is most likely over. Our straightforward calculation as to how high we could go currently has a target up around 5,111. We’re not that far away. If that target should be exceeded, the next one could be up around 5,400.

No matter how we look at it, the stock market is rising and there appears to be little in the way of anything stopping it. Until something out of the blue does; i.e. the proverbial black swan event. A major bankruptcy? An unexpected turn in the wars? Something else? Be prepared. A turn could come at any time. Nothing goes up forever. No, this time is not different.

Speaking of a black swan we’ve learned that the U.S. has almost $10 trillion of debt maturing in 2024. That’s made up of $7.6 trillion public debt (federal, state, municipal) and some $800 billion of corporate debt with another $1 trillion corporate debt due in 2025. How much is BBB and lower? Answer, most of it. The EU has over a trillion euros due and corporate EU debt due is over four trillion maturing through 2025. Who is going to buy all of this debt? Global debt now tops $313 trillion.

Last week the SPX gained 1.7% and the DJI was up 1.3%, both to new all-time highs. The NASDAQ made 52-week highs but remains short of its all-time high, up 1.4%. The DJT is nowhere near its all-time highs but did pop 1.9% this past week. The S&P 400 (Mid) gained 1.1% to new 52-week highs but the S&P 600 (Small) fell, losing 0.7%.

In Canada, the TSX Composite continued its recent upward march, gaining 0.3% to new 52-week highs. Joining the TSX was the TSX 60, and both Consumer Staples (TCS) and Industrials (TIN) made all-time highs. In the EU, the London FTSE fell a small 0.1%, the EuroNext was up 1.4% to new all-time highs, as was the Paris CAC 40, up 2.6%, while the German DAX was up 1.8%.

Seems the EU stock markets are in a bubble rise as well, despite the stalemated war next door. In Asia, China’s Shanghai Index (SSEC) continued its recent recovery, thanks to PBOC cutting rates, up 4.8%. As we noted, the Tokyo Nikkei Dow (TKN) finally took out its all-time high, up 1.9%, and Hong Kong’s Hang Seng (HSI) gained 2.4%.

Over at the other side, gold continues to baffle and confuse. Gold bugs can’t figure out why, but with the background we have, gold is not at record prices. Well, it did make a record high back in December on a spike overnight that by morning had washed away completely. Silver, the gold stocks, platinum? All are so far away from their all-time highs that we have trouble seeing where the old high was.

Silver remains 54% under its all-time high, the Gold Bugs Index (HUI) is 67% away, the TSX Gold Index (TGD) remains down 46%. Platinum is still down 60% from its high way back in 2008. The junior mining dominated TSX Venture Exchange (CDNX) is down 84% from its all-time high back in 2007. Ouch!

Gold gained 1.3% this past week, but silver gave back following its strong up week last week, losing 2.1%. Platinum was off 0.4%, palladium gained 3.8%, and copper was up 1.6%. We consider copper a leader, so watch it. The HUI lost 0.7% and the TGD fell 1.9%. All this against a backdrop of the currencies doing little as the US$ Index fell 0.3% and the euro was up 0.4%.

The rest were just mixed. Speaking of currencies, we keep reading Bitcoin is going to overtake and replace the U.S. dollar (don’t count on it). Bitcoin is within 26% of its all-time high even as it fell 1.1% this past week. But Bitcoin is still a big winner in 2024, up 21.5%.

What worries us about gold is the forming what appears to be a descending triangle. Naturally, we don’t want to see that, but if that bottom end near $2,000 falls out, the fall could be a drop to $1,835. The upside breakout is near $2,060 and projects up to $2,225. If the former happens, it should be the last hurrah for a drop but it will shake the market to the bone. Sentiment would fall swiftly and maybe this time the gold bugs will leap out of windows.

Whatever, it would be final shakeout. We’d prefer not to see a drop on teh stock market but recognize we shouldn’t dismiss the potential nasty descending triangle. Once that low is made, a major rally should get underway as the background remains too compelling to ignore gold. And, no Bitcoin is not the same as gold.

“Be prepared” seems to be a motto for both stock markets and gold markets.

Markets & Trends

			% Gains (Losses)                              Trends
	Close Dec 31/23	Close Feb 23, 2024	Week	YTD	Daily (Short Term)	Weekly (Intermediate)		Monthly (Long Term)
Stock Market Indices
S&P 500	4,769.83	5,088.80 (new highs)*	1.7%	6.7%	up	up		up
Dow Jones Industrials	37,689.54	30,131.53 (new highs)*	1.3%	3.8%	up	up		up
Dow Jones Transport	15,898.85	15,921.02	1.9%	0.1%	up	up		up
NASDAQ	15,011.35	15,996.82 (new highs)	1.4%	6.6%	up	up		up
S&P/TSX Composite	20,958.54	21,313.15 (new highs)	0.3%	1.7%	up	up		up
S&P/TSX Venture (CDNX)	552.90	548.14	(1.6)%	(0.9)%	down	down (weak)		down
S&P 600 (small)	1,318.26	1,295.48	(0.7)%	(1.7)%	up	up		up (weak)
MSCI World	2,260.96	2,294.93 (new highs)	1.7%	1.5%	up	up		up (weak)
Bitcoin	41,987.29	51,020.52 (new highs)	(1.1)%	21.5%	up	up		up
Gold Mining Stock Indices
Gold Bugs Index (HUI)	243.31	207.96	(1.4)%	(14.5)%	down	down		down
TSX Gold Index (TGD)	284.56	251.57	(0.2)%	(11.6)%	down	down		down
%
U.S. 10-Year Treasury Bond yield	3.87%	4.25%	(0.7)%	9.8%
Cdn. 10-Year Bond CGB yield	3.11%	3.46%	(3.6)%	11.6%
Recession Watch Spreads
U.S. 2-year 10-year Treasury spread	(0.38)%	(0.44)%	(23.3)%	(15.8)%
Cdn 2-year 10-year CGB spread	(0.78)%	(0.71)%	flat	9.0%
Currencies
US$ Index	101.03	103.96	(0.3)%	2.9%	up	up (weak)		up (weak)
Canadian $	75.60	74.10	(0.2)%	(2.0)%	down	neutral		down
Euro	110.36	108.21	0.4%	(2.0)%	down	neutral		down (weak)
Swiss Franc	118.84	113.47	(0.2)%	(4.5)%	down	up		up
British Pound	127.31	126.70	0.6%	(0.5)%	down	up (weak)		neutral
Japanese Yen	70.91	66.45	(0.2)%	(6.3)%	down	down		down
Precious Metals
Gold	2,071.80	2,024.10	1.3%	(1.1)%	neutral	up		up
Silver	24.09	22.98	(2.1)%	(4.6)%	down (weak)	down		neutral
Platinum	1,023.20	909.60	(0.4)%	(11.1)%	down	down		down
Base Metals
Palladium	1,140.20	988.50	3.8%	(13.3)%	down	down		down
Copper	3.89	3.90	1.6%	0.3%	up	up		down (weak)
Energy
WTI Oil	71.70	76.49	(2.5)%	6.6%	up	neutral		neutral
Nat Gas	2.56	1.70 (new lows)	5.6%	(33.6)%	down	down		down

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(Featured image by Nicholas Capello via Unsplash)

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