Nothing to say, yet
Transcription
The host, Chris Klein, discusses the current state of the stock market and the potential for a market correction. He mentions that there are indicators, such as volatility, price, and volume, that suggest the market may be overextended. He also talks about the importance of monitoring the rate of change of the M2 money supply, which has been declining for 12 consecutive months. He compares the current situation to the Great Depression but notes that the M2 money supply has increased significantly since before the pandemic. He emphasizes the need to understand the structure of markets and diversify investments beyond just stocks. He also mentions the importance of analyzing currencies and the market cycle rather than focusing solely on calendar year returns. This is Care For My Wealth with Chris Klein of Capstone Wealth Management, your fee-only investment firm. I'm your host, Chris Klein from Capstone Wealth Management. We are a private fee-only investment management firm designed to help you figure out how the madness of markets are working and hopefully put you ahead of the game. You can reach us in a number of different ways. You can reach us at our website careformywealth.com. You can also call us toll-free at 866-596-9886 or email info at careformywealth.com. We certainly welcome your questions and welcome comments with regards to our show content. Here we are in the start of 2024, and of course everybody is of the position that stocks only go up. It reminds me very much of what we experienced in 2001 from September to January when stock markets just ripped. And then we got into January of 2002 and markets said, hey guess what, the bear market's not over yet and imploded on everybody. And now am I saying that that's going to happen this time? Well sort of, but we of course don't know. What we do know is that there's lots of history to support that markets have, well to the very least, gotten a little stretched here. And there's a number of elements that help us to understand that. One of them is volatility. One of them is, of course, price. One of them is, of course, volume. And so we combine these things in a calculus of price, volume, and volatility to give us a better indication of where markets are likely to move. And so if you've never had the opportunity to listen to me before on The Care for My Wealth Show, one, I'd like to invite you or thank you for taking the time out of your day and your schedule to join me. And what I'd like to do is make sure over the next hour or so that we are giving you as best information as possible on how to protect yourself from anything that might occur in markets. Now, is that to suggest you want to protect yourself from every little dip that occurs in a raging bull market? No, of course not. But what it does mean is to help you understand when the trends of markets change. And when the trends of markets change, that's when you've got to be careful. And you can go back on our website and look at all of our archives. I've been doing shows for years and years and years. And if you go to careformywealth.com and pick up some of our archives, you can see and hear back in November, December of 2021 and January of 2022, we were talking about some things that were happening in the structure of the market and specifically with the rate of change of both growth and inflation and ultimately the Fed's response to the change, the rate of change of that growth and inflation that would likely bring about a pretty difficult bear market. And in fact, it did. And so what were we talking about back then? Well, we were talking about how the acceleration of growth and inflation was creating an environment where the Fed had to act and they had to act by doing two things, raising interest rates and then ultimately reducing their balance sheet. In other words, pulling money out of the system. It's kind of the best way to look at it. And when that happens, it tends to create a problem for risk assets. And sure enough, January of 2022, markets rolled over. And I suppose the rest is history for at least that year where lots of people were just not prepared. And we attempted very, very much so to prepare everybody for the likelihood of what 2022 was going to bring. And it did. And so now here we are in the beginning stages of 2024 after a ripping year of 2023 that, frankly, very few, if anybody, expected. Why? Well, because the Fed continued their tightening campaign. The Fed continued to reduce their balance sheet by pulling money out of the system. The rate of change of M2 money supply has dropped at a rate, a rate of change that, frankly, we've not seen before. And that rate of change is actually now negative. And that's fine. I hear lots of people talking about M2 and it's going to bring about the next depression. The drop of M2 is now negative. And so that's what happened during the Great Depression. And so you hear a lot of those narratives thrown around. Sometimes that's designed to scare you. Sometimes that's designed to wake you up a little bit. In this instance, what we have to recognize is that, yes, the rate of change of M2 money supply is negative. It's come down dramatically over a fairly short period of time. And so just like the Fed's rate hiking campaign, where we experienced a speed and an amount that was historic, the drop in M2 on a percentage basis, rate of change basis, if you will, is also pretty historic. But what we have to do is look at that in the context of where was it, for example, pre-pandemic to now. And what you'd see if you looked at a picture of M2 money supply, which is cash checking, savings deposits, time deposits, stuff that can be readily converted to cash. That's essentially M2. That's money in the system, right? And money in the system is very important. It's crucial to understand how that functions as it relates to economic health and economic prosperity, if you will. And if you think about M2 representing the total amount of money in circulation, which I mentioned all the types there just a moment ago, what you'd identify and notice is that M2 money supply, as it expands, it indicates increased liquidity and the potential for economic growth. Growth obviously is good. The opposite of that, of course, is that a decline in M2 signals a tightening element of liquidity and a potential for an economic slowdown. Think about it as gas in the engine of your market car. And if you take the gas away from the engine of that car, it's going to slow down and in some cases flat out stop. We would call that a recession. So if you think about the decline in M2 that we're witnessing, it's not just something that's notable. It's actually historic. And, you know, again, I guess in 2023, we can add that to the list of things that, wow, that's never happened before. And what we have to see, obviously, is that the M2 money supply has declined for 12 consecutive months on a year over year basis. And it's actually the first time in our nation's history that that's occurred since the Great Depression. And so you see some of these things getting thrown out there on X or Facebook or whatever the case might be. And that's fine. That is a real thing. You pick up the data from the Fed. They have a website called FRED, interestingly enough, and you can get all sorts of data from them that helps us to understand what's happening with monetary policy. But one of the things that we want to do, of course, is make sure that we're asking ourselves, OK, well, the rate of change of M2 is certainly changing for the negative. And it's now comparing itself to times where, historically speaking, we had lots of economic problems. But then we have to ask ourselves, OK, well, where was M2 like in the summer of 2019, you know, before the Fed came in and just piled piles of cash into the system because of the whole COVID situation? Well, if we look back to, say, August of 2019, you'd find about $14.9 trillion of M2 in the system. Well, let's fast forward that. And now we're here in 2024 and we've got a situation where M2 is running, you know, just shy of $21 trillion. Hmm. OK, well, that's a that's a pretty big difference, a big increase, if you will, in the money supply. And so what does that mean? It means that the Fed has a lot of room to be able to take funds, if you will, from the system. And you could, in fact, see the rate of change of M2 get a lot lower before, you know, any real economic problems kick in gear. Now, that's to say that the stock market in general is not going to go through a correction. No, it's never just one thing. And that's one of the things that we we talk about all the time at our firm is that you can't just be myopically focused on one thing or one asset class. And unfortunately, that's what most people get when they turn on financial news programs. The only thing that's ever being talked about is the stock market and stocks. And make no mistake, that's Wall Street's job. Their job is to sell you stock. It's not their job to help you to protect your wealth. And that's one of the primary focuses that we have at Capstone Wealth Management is a primary focus of helping you understand how the structure of markets works so that you can get out of the way of imploding bear markets and back in the way of real bull markets. Now, I emphasize that word real only because on the heels of what everybody saw and experienced in terms of a price change of the stock market, S&P, Nasdaq, Dow Jones, whatever you want to look at. There's some very real differences in what took place in 2023, comparative to lots and lots and lots of other instances in history where we had some similar financial conditions. And one of the things that we look at when it comes to analyzing markets, of course, is not just the stock market, but we want to look at currencies, the currency market as a whole, the US dollar, the yen, the euro, the British pound. How are all of these different currencies functioning within the context of the current economic cycle? And so you'll hear me use that term a lot, the cycle. There's cycle time and there's clock time. Cycle time is exactly what it says, the business cycle that manifests itself into the market cycle. And cycles don't operate on the calendar. Unfortunately, we've become so conditioned to look at returns from January 1 to December 31 that we forget that that's not how markets function. That's how Wall Street gets paid. They get paid their bonuses based on what they do this year. And what you really want to be looking at is not so much the return of January 1 to December 31, but what's happening within the confines of the cycle. And so what are the market cycles? Well, the market cycles in terms of how the economy is cycling, and there's basically four different economic cycles, if you want to put them into a broad macro picture. If you think of how growth and inflation work with one another inside of an economic cycle, it'll help you then to understand what kinds of things work inside of that market cycle, inside the economic cycle. So hopefully that's not very confusing. But at any rate, if you have growth accelerating while at the same time inflation is decelerating, that's essentially Goldilocks. And so you hear people on TV talk about, oh, it's a Goldilocks environment. It's a Goldilocks market. It's a Goldilocks economy. Well, there's a definition to that, and it's growth accelerating, inflation slowing. All right. In most cases, most anything stock related does well. Tech does well. The S&P tends to do well. You just have an environment where things work and work pretty well. The next economic cycle that you run into is growth accelerating, inflation accelerating at the same time. And interesting, this is where everything works. And I mean everything from garbage to great. And when I mean garbage, I'm talking about the meme stocks that you see bantered around, penny stuff, special acquisition corporations or SPACs that are holding on to just literally these junk companies, crypto of all stripes, you know, the gaming coins. I mean, you name it, it does well. There are in often cases a lot of very high short interest stocks inside the midst of an economic cycle where you've got both inflation and growth accelerating at the same time. Now, what does that mean? It just means that there are a lot of hedge funds and other operations that have bet against certain companies. They've shorted them. In other words, they've borrowed their shares in the open market. They've been sold them to the open market and attempt is to buy them back at a lower price for a profit. That's what they're attempting to do by shorting those positions. And and so inside that economic cycle, those shorts get carted out. They get completely blown sky high. So this is what you see when a market goes through a, quote, short squeeze. The shorts are getting squeezed out of their positions. They have to buy those shares back to cover the short. And so it creates like a double environment of buying for that stuff. And so that economic cycle is exactly what we experienced in 2021 when things went almost straight up. Lots and lots and lots of stuff worked and lots of garbage things worked really, really, really well. The next economic cycle that you might run into would be stagflation. A stagflationary environment is, of course, where you see growth decelerating with inflation accelerating. And in that kind of an environment, it gets tough. Some stocks work better than others. In most cases, bonds aren't working wonderfully. Gold tends to work pretty well in that kind of an environment. So the idea is that there are certain asset classes that fit better inside certain economic cycles. And stagflation is one of those that's just flat out hard. The last economic cycle we had that was stagflationary in nature was really hard because the Fed hadn't really reached peak interest rates yet. And so savings and CDs and bank notes and things of that nature where you'd be getting an interest rate were just terrible. And so there was nowhere to really park your money to make it make any sense. And so then you had to walk out on the risk continuum and, you know, take some calculated risks on certain positions that would help help minimize the deflationary aspect of market activity. So stagflation is not a lot of fun. But the one that's really not fun is deflation. And this is a term that you don't hear maybe all that often, but it's a term that you should definitely get accustomed to. It's something that you should understand exists in the midst of market cycles. And what is that? Well, it's where you have both growth and inflation decelerating at exactly the same time. And growth and inflation decelerating exactly the same time is not good. It is an environment where you tend to see market crashes. It's that economic cycle that we rolled into in January of 2022. And what you tend to find inside that are all sorts of explosive types of headlines that hit the wires. And interestingly enough, for whatever reason, conflicts of all different kinds, geopolitical and otherwise, tend to arise in the midst of those economic cycles. Why? I don't know. I'm not a mind reader. I don't know what those people might be thinking when those conflicts occur. But deflationary cycles are just, they're just bad. We often joke that the people who end up getting hired up by the Federal Reserve are taken into a back room and had their DNA changed to never accept deflation. Deflation is a terrible cycle, and here's why. If you think of market prices and you see them deflating or declining on some purchase that you might want, maybe it's an intermediate size or even a large purchase like a car or a house. If you see the price declining, what do you do? That's right. You wait. Unless, of course, some things come up where you just have to, you know, you have to make a choice. You have to make a decision on it. But in most cases, all things being equal, if someone has the opportunity to hold out a little bit, they will. And so it creates this deflationary spiral where these lower prices beget lower prices. And at some point, that deflationary spiral has to stop, and it usually doesn't stop until a catalyst is put in place of some sort, and that catalyst is usually pushed forward by the Federal Reserve by changing monetary policy to some extent. So this is the kind of thing where you want to recognize what it looks like when deflation is starting to take hold, or you want to recognize what it looks like when that economic cycle is starting to take hold. And it's often earmarked by high degrees of rising volatility. And there's different ways to measure volatility. Now, we measure volatility by literally everything that ticks in the open market. Currencies, bonds, stocks, commodities, you name it. We look at all of those things, and every single thing that ticks has its own volatility component. But the out-of-the-box volatility component for the S&P 500, for example, would be VIX, V-I-X, and it is just a measure of volatility in the market. And volatility has been incredibly suppressed. It's actually very, very interesting when you start to see how volatility has traded over the past several months. And with the exception of a few spikes here and there, it just really has been very interesting. And in most cases, when we get volatility just languishing down in this 12 area for VIX, it tends to be a precursor for a change. Well, what's a change? Well, the change tends to be a rise in volatility. Now, we have very, very important, very certain levels of volatility that we want to pay attention to. And what I need to do is just take a very, very quick break. And when we come back, I'm going to talk to you more specifically about how to measure volatility as it relates to looking at a calculus of price, volume, and volatility that when it breaks above those levels, look out. Something's changing. Something's happening. And it'll give you an indication on when it might be an opportunity to step aside the market as a whole and wait and see what might be happening. So hold on for a minute. We'll be back and we'll resume our conversation. Again, this is Care For My Wealth with your host, Chris Klein from Capstone Wealth Management and the Care For My Wealth Radio Network. You're listening to the Care For My Wealth Show with Chris Klein of Capstone Wealth Management. Check us out online at careformywealth.com or on Twitter, now X, at Care For My Wealth and also all the major podcast platforms. OK, so we were talking about volatility, how to read it, how to better understand it in the confines of reading, not just economic cycles, but more importantly, when it comes to protecting your wealth, how to read when it appears volatility might spike. So why is that important? Well, because if volatility spikes, it drives market prices down. You know, one of the things that you have to remember with respect to market structure is that money leaves where it's not being treated well. Money goes towards things that are treating it well, and it will naturally find where those things are. Well, how does it do that? Well, it does it essentially, if you want to think of it this way, through a volatility component. Money will leave those asset classes with high and rising volatility, and money will come into those asset classes with declining and slowing rate of change or dropping volatility. And so if you think about broad equity market volatility, as defined by, in this case, VIX, V-I-X, and it trades, so you can buy futures and options on VIX, and lots and lots of big institutions do this. I think that that's a way to be very problematic for a portfolio, and so you probably should stay away from trading VIX products that are available in the marketplace today. But, you know, hey, if it's something that excites you, I guess knock yourself out. But beware, it moves, in many cases, very, very fast. And in most instances, like what we've seen recently, it would appear that volatility is being suppressed. How? Hard to say, really, from an institutional structure. But nevertheless, a level of volatility that we're watching very, very, very carefully right now on VIX is 14.03, 14.03. Why is 14.03 important? 14.03 is important because that is the level of trade. Now, when you hear me use certain terms like trade or trend, what you have to recognize is that it's really just a time series. Now, it is a mathematical level as defined by price, volume, and volatility. Yes, volatility has its own volatility, so volatility of volatility is very valuable when understanding how it's going to move and what might happen to the market in response. And again, markets move inverse to the movement of VIX in this case, in most cases. In some instances, you can see VIX up, markets up. That usually is an indicator of, OK, something's a little weird. But nevertheless, 14.03 on a trade basis, which is a very short-term, three-week-or-less definition of a time series of something in the market. Why is that important? Well, from a market structure standpoint, when that level breaks, when something moves above that trade level, again, that time series of three weeks or less, this calculus of price, volume, and volatility, when it breaks above that, market algorithms tend to chase that thing, and it may be as it breaks above that trade level that it's ready to go through a phase transition from bearish to bullish, or in some cases, bullish to bearish. If it's bullish, it's something that's going up. If it's bearish, it's something that's going down. And so if we've got VIX languishing in a bearish trend, continuing to trend lower, the first thing that will happen before it goes through a phase transition from bearish to bullish is that it's going to break above that trade level. So keep 14.03 in your minds. If you see VIX break above 14.03, chances are good the market might be down on a day like that. The next super valuable level is 14.98. 14.98. Why? Because that's the trend level. What's trend? Trend, again, looking at it from a time series perspective, is three months or more. And it's just that same calculus of price, volume, and volatility that when wrapped together, if it breaks above that, it changes its phase from bearish to bullish. Now, why should you care about that? If VIX moves into a bullish condition, that's going to move the market eventually, if VIX doesn't break back down again, into a bearish condition. How did we know, November, December, January of 2022, November, December of 2021, how did we know that the markets were rolling into a bear market? Because volatility was starting to break out. It was moving above certain component levels that suggested it was changing its phase from bearish to bullish. When volatility changes from bearish to bullish, markets go through some problems. But again, it's got to be above these levels for longer than a hot second, right? It's got to have some time there. We usually give it three days. So if, in this case, VIX breaks above $14.03, trades above that for a day or so, and then pops above $14.98 and stays there for three days, well, chances are really good that that is a phase change. Now, sometimes it's hard to react to that. Why? Because sometimes when VIX decides to break out, it goes straight up. And you think back, if you can, to the time in early 2018 when Volmageddon hit. Volmageddon. Most people may or may not remember the Volmageddon volatility event. But that's when volatility went cuckoo for Cocoa Puffs. It went straight up. So we don't have to go back all that far to remember what that was like. But during that time, the beginning of the year, actually came in like the beginning of February, volatility was just hanging out, hanging out down in the 9-10 range. Now, that 9-10 range, that's pretty strong bull market territory for equities with VIX down there. But in a very short span of time, it broke above trade and trend at the beginning of January. And then all of a sudden, from about the end of January to the second or third of February, VIX went from roughly 11 to 12, all the way to a high of 48. Markets didn't like that. And so you might remember during that time frame, the S&P 500 got walloped for a very short period. But nevertheless, in like a four or five day time cycle, the S&P 500 was down seven or eight percent. And the NASDAQ over that same period of time was down six, seven percent, somewhere in that range. I remember it very well, because when volatility breaks out like that, and you watch it every day as closely as we do, it has an implication. And so this is how you know when something's changing. If there's a phase transition going on between a very important component like volatility going from bearish to bullish, pay attention. If it stays above trade and trend for more than a hot second, we like to give it three days if possible, then it's changing its transition. Now, sometimes you need to act more quickly. For us, what we do when managing portfolios is that when we see that happen, we start to take some risk off the table. Oh, VIX broke above, in this case, $14.03. Well, that's above trade. Okay, it might come back down, it might not. What should we do? Well, maybe right now I'm going to take just a little bit of risk off. And if we've got some exposure to equities, maybe I sell a couple of percentage points of it in the portfolios. Pull them down just slightly. Get away from some of the risk that might be coming. Pops up above trend and stays at that $14.98 for maybe two days. Maybe that's enough for me to pull the equity exposure down even more. If it stays there for three days, chances are really good, I want to pull the equity exposure completely out, or in some cases, even go countermarket, right? And that would mean potentially adding some short positions into the portfolio to take advantage of a market drop that, of course, has a tendency to occur when volatility spikes. Now, coming up this month, January, if you will, is a volatility expiration date of January the 17th. We call it Vixperation. Creative, right? Anyway, when volatility on futures and options expires to the magnitude and extent that is happening on January 17th, it has the opportunity to open up what we call a window of weakness. If a window of weakness opens up in the market because volatility has shifted, well, then that opens up the opportunity for the market to go through a period of weakness as well. Now, is that to suggest it's going to crash? No. Is that to suggest that conditions start to ripen for something negative in equity markets to occur? Possibly. Then we have to watch very, very carefully how VIX that day responds to the movement in its volatility of volatility component. And so it's not just VIX, but it's also other elements of volatility, like VXN is the out-of-the-box volatility component for the NASDAQ. And in that instance, if we saw it break above $17.45, that's a concern. If we saw it break above $18.85, it might be actually going through a phase transition into a bullish mode, which if that happens, again, markets on the NASDAQ would be rolling into a bearish mode. So these are some of the things on a very simplistic level on how to identify when and where something is shifting. Now, you might be saying, well, that's great, Chris, but where in the world do I get these data points, these levels, this trade, this trend, all this stuff? Ah, good question. To some extent, ancient secret, we do have a very proprietary method, if you will, of calculating price volume and volatility, trend and trade levels that give us an indication of whether or not an asset or a volatility measurement is moving from bearish to bullish, bullish to bearish, if it's going through a phase transition. So those are things that you're not likely to just find anywhere. And every single week when I'm on, I will absolutely talk about the current VIX components and the levels of volatility and things that you need to watch for and pay attention to. But for now, just be cognizant of those numbers that I gave you and recognize that that is certainly something and a level that we want to pay attention to. What else? Well, the other things that we pay attention to are interest rates and currency markets. Currency markets are huge. Most people recognize that currencies as a whole, in terms of markets, are tremendous, huge, as they say. And the U.S. dollar, of course, always has narratives wrapped around it from the dollar is going to go away. We're going to lose reserve currency status. You know, yada, yada. You've heard it 60 million times if you've heard it once. And so the simple narrative that gets thrown around is that, well, you think about the U.S. dollar is that it weakens as U.S. exceptionalism and relative policy and growth elements diverge from one another, right? What does that mean? Just monetary policy comparative to the growth component. Is growth accelerating or decelerating? Is Federal Reserve monetary policy expanding or contracting? It's a simple way to look at it. However, when those things occur, you tend to see a subsequent move in financial conditions. And if financial conditions ease, then, well, things priced in dollars get a reflationary bid. They go up, right? Right now, there's a negative correlation that exists between the U.S. dollar and most assets that trade in the open market, specifically the S&P 500. And so what does that mean? Well, it just means that if the dollar goes down, it acts as a pretty big headwind to a stock market movement. And if the U.S. dollar goes up, it acts or vice versa. If the dollar goes down, it acts as a tailwind. If the dollar goes up, it acts as a bit of a headwind, right? Inversely proportional, negative correlation, if you will, right? So just think of it that way. As we look at the U.S. dollar, and again, we look at the currency markets every single day, not just the U.S. dollar, but we're looking at the euro, the yen, all these sorts of components that trade on the global macro scale. The U.S. dollar broke to a bearish trend, and it did it mid-November, right? And what I mean by that simply is that it broke below the trade level. That trade level at the time for the U.S. dollar was at about 105.90. And when I talk about the dollar index, this is symbol DXY. You can look that up online anywhere you like, but it's the dollar index that I'm talking about. And so it broke through a trade level about 105.90 back on November the 13th. And then the very next day on November the 14th, the U.S. dollar just got hammered, and it dropped right through the trend level, which at the time back then was about 104.70, 104.50, somewhere in that range. It then kind of bounced around sideways, tapping up above that trend level, tapping up that trend level, and then went down harder all the way to about 102.80. And then it rallied back up, tapped that trend level, and failed again. Now, that's an interesting development because if there's a negative correlation with the S&P 500 and the U.S. dollar, and the dollar moves into a bearish phase transition, well, then that's a tailwind or a pusher behind the U.S. stock market. And so it helps you to get an indication of, all right, well, all things being equal, if volatility stays muted and low, and the U.S. dollar moves into a bearish phase transition, that's going to support or help me wanting to own U.S. equities. Or if you happen to be short the market because you think it was going to crash, helps you to make a decision to maybe unwind those shorts and move to the side, and then pick up some positions that would express an ownership or a long position, as we call it in the U.S. stock market. All right, that's fine. If you think about how this has happened in terms of creating the reflation situation, the next question you have is, well, what's going on with these financial conditions? And that's important. Because as the U.S. dollar has moved itself into this bearish trend, the situation is not different. Financial conditions have eased, and they've eased to the point of having an equivalent of 5.5 rate cuts. Now, let that sink in for just a second. Nothing has happened with the Fed. They haven't cut rates. All they've said is, we estimate three rate cuts in 2024, and that's where they ended it, right? That was basically how the conversation went. Markets suggesting something way different, right? We've just seen the biggest two-month easing in financial conditions in the history of markets, and that surpasses all of the announcements that we had of quantitative easing one, two, and three, where the Fed liquefied the system with piles of money, so on and so forth, right? The market is currently pricing in the same roughly five to six rate cuts in 2024 for the Fed, the European Central Bank, the ECB, the Bank of England, right? The market's pricing this in despite all these divergent initial conditions and relative macro issues. What do I mean by relative macro issues? Oil going down, long-term bond yields dropping. Those are two huge components of identifying whether or not the market sees recessionary conditions. Oil dropping is a function and component of demand slicing down, dropping. If demand drops on something that maintains energy levels, it's just simply a function of the market suggesting that it sees recessionary conditions. Same thing with long-term bond yields. So here we are. We've got financial conditions doing the work of 5.5 rate cuts. The market expecting 5.5 to 6 rate cuts in 2024. 10-year yields fully retracing the entire September-October rip-hire. And now if you look at 10-year treasury yields, they're essentially flat as the year came to a close. So the question is, all right, is everything priced for this, quote, soft landing perfection that the Fed has talked about and that everybody on X and Facebook and everywhere else is talking about? Soft landing, no recession, yada, yada. Look, the emergence of any relative growth or policy divergences from what they have said and what we have seen from here is likely to flow through to the currency markets. How? It's likely to happen in the form of the U.S. dollar forming a bottom and moving higher. Now, interestingly enough, last week, we actually saw a buy signal on the indicators that we use. And again, we have a very deep functional process of looking at how macro markets trade. We always view them through the lens of price, volume, and volatility. We look at them in terms of overbought, oversold, all sorts of different economic conditions that control the movement of assets. And last week, the U.S. dollar signaled a buy. Now, does that mean it's moving into a bullish phase transition from its current bearish? No, not yet. But when you do the calculus of figuring out, well, what's the probable range of movement for the U.S. dollar in the current short term? The answer is that it has a top-end component of about 102 on DXY, which is the dollar index. Well, if it breaks above that, the next level is 103. If it breaks above that, the next level is just a little bit above 104. If it did that, if the U.S. dollar broke above 104, it would experience a bearish to bullish phase transition. Bullish to bearish phase transition in the U.S. currency market might suggest that the soft landing narrative has been too far done, pushed too far forward. That's what I mean by watching growth and policy divergences flow through to the currency markets. Any form of deepening, either global or local, slowing growth or slowing inflation conditions, it's likely to happen in the form of watching and seeing a renewed bid for the U.S. dollar. The dollar is going to want to move higher in value according to, again, that dollar index symbol DXY. So those are important levels to think of as well, right? The most important would be if it broke above like 103.11 on the DXY and 104.04 on the DXY. If it broke above those levels, then it's absolutely going to experience some movements and some motions north, bearish to bullish phase transition. And if that happens, well, that could coincide with volatility breaking out because maybe it's the market signaling that it's gotten too far ahead of itself. Maybe there has been some underground chatter that the Fed's not really going to cut interest rates to the extent that they have said. Who knows? Again, the amount and the multitude of things that go on underneath the surface of the price that you see is dramatic. And so we want to pay attention to these kinds of things. And the U.S. dollar is one of these that is a very, very big area to pay attention to. Now, that said, I don't think if it shoots up towards that 103 level, it's just going to go north. I think what we need to see first is we need to see a capitulation, right? Or a giving up. And in this instance, if the U.S. dollar came back down towards that 100 level and maybe slightly broke below that 100 level, I think chances are the bulls on the U.S. dollar, those that expected the U.S. dollar to just keep cranking higher, might give up. They might capitulate. Well, that's the first indication, if that happened, that the dollar probably is not breaking down, but in fact getting ready for a bearish to bullish phase transition, which could usher in the next leg of the stock market. Now, why do I bring that up? Because as I said before, if we think back to how markets traded in this fall, September roughly of 2001 to January of 2002, it had a 40% rip hire. NASDAQ went nuts. Everybody was excited. New bull market. The narrative sounded exactly like they sound today. And yet what happened? Well, from January to the bear market bottom in October of 2002, the market fell about 40%, 45% on the NASDAQ. So all the bulls that got excited and bought in December, January, February of 2001 and 2002 got completely eviscerated, thinking that it was a new bull market. And I bring this up because there are so many indications today that suggest to us that the cycle is not over. Bear market cycles don't end in a whimper. They end with a complete bludgeoning where people are disgusted, can't imagine that they're being invested anymore, don't ever want to invest again. They're done. People give up when a bear market bottoms. And we haven't seen that. We didn't see a degree of fear that is consistent with a real bear market bottom. That's number one. And we haven't seen unemployment levels hit a level that are typically consistent with a bear market bottom that coincides with an economic cycle that's bottoming. So that's important. So there are two big deals that I'm giving you to help pay attention in the coming week. Volatility and the U.S. dollar. Notably speaking, and I'll talk about this more as the weeks ensue, but especially as we come up to VIXpuration on January the 17th. I'll definitely be talking about this more and more. But it's an area that you want to pay attention to. Dollar, VIX. A lot of people ask me about gold. I get it. The yellow metal is exciting to lots of people and the expectation, if you will, that this market is imploding on itself. The dollar is being debased. We got to move back to a hard currency. Perhaps another reason why Bitcoin has become so favorable in so many people's eyes. The reality is that gold is a rates play. And here's the equation. This is an important equation for you to think of. The U.S. dollar down creates an environment for real yields to go down, creates an environment for monetary easing to go up, which creates an environment for gold to respond very, very bullishly. And just last week, we had that equation in a textbook format. And what happened? Gold hit all time highs. Well, hallelujah. It wasn't that wonderful if you owned gold. We happen to own some gold. Why? Well, because it's consistent with the economic cycle that we're in right now. Does that suggest that you want to pile everything you own into gold? No, that would be crazy. You don't want to do that. You want to make sure that your portfolio is structured specific to the economic cycle that we're in, but more importantly, diversified in a way that if things move against you, it doesn't hurt you. What you don't want is to go through a 2002 bear market finale that caught a lot of people off guard because they had no process to understand what was happening with global currency, global macro, and volatility markets. If you can get just those basic components correct, you'll be so much farther ahead than the average investor. You'll be so much farther ahead than even many of the average advisors out there these days. These are not things that for the most part, lots and lots and lots of people talk about. I would suspect that hearing me talk about these things in this way might be the very first time you've heard it. And if that's true, OK, cool. I'm excited for that because my hope is that you continue to come back and join me each and every week here. And learn more about how markets function and their structure and most importantly, what to do about it. So we're going to take another very quick break and let that sink in a little bit. And when I come back, we'll just continue to expand on our conversation on how to make sure that you're a successful investor by doing your best to understand some macro moves that will keep you out of trouble. OK, stay right there. You're listening to The Care For My Wealth Show with Chris Klein of Capstone Wealth Management. Check us out online at careformywealth.com or on Twitter, now X, at Care For My Wealth and also all the major podcast platforms. OK, welcome back to The Care For My Wealth Show. I'm your host, Chris Klein, with Capstone Wealth Management on the Care For My Wealth radio network here. You might have guessed from the last several conversations or segments, I should say, of today's show and perhaps if you've listened to some of our archives, which, again, you can find on our website, careformywealth.com or on any of the major podcast platforms, you can find us under the Care For My Wealth Show. You might have figured that I'm not one that fully believes in its entirety that this bear market that actually rolled into action in January of 2022 has perhaps seen the end of its days. Now, that said, the NASDAQ and the S&P 500 and the Dow Jones Industrial Average definitely are in bullish trend. And we talked about trade and trend levels in the last segment in terms of the time series. We're viewing them in the context of price, volume and volatility. And so those two indexes or three indexes, rather, are in bullish transition, bullish phase, bullish move. The Russell 2000, which is perhaps the broadest perspective of U.S. equities or broader measurements of U.S. equities, I should say, is still in a bearish trend. And many people often forget that the Russell 2000, which, again, is more of a small cap component. Small caps tend to not do amazing if in the event a recession kicks in. And I talked often during the beginning phases of our show today about cycles. And I talk about them in terms of cycle time versus clock time. Clock time is just what you see on the clock. Oh, look, it's 845 or whatever the time is. It's the time on the clock. Cycle time is the time in the economic cycle and how it manifests into the market cycle. The peak of the market cycle for the last one that we were in was November the 8th, 2021. That was the market cycle peak. And when that happened, the Russell 2000 was trading much higher at roughly 2435 in that neighborhood. So what does that mean? Well, it just means that the Russell 2000 still, as we speak today, is down about 15, 16% from its cycle peak. So cycle peaks and cycle troughs are very important to understand in terms of understanding whether or not the market cycle is bullish or bearish. Most importantly, though, is the transition in volatility. That's probably one of the biggest keys in terms of whether or not markets are transitioning from bearish to bullish phase or vice versa. So a large component of U.S. equities are still there. That's important to recognize. But one of the things that I think is very important to recognize, too, is the yield curve. And if you think of the yield curve, it's just simply comparing short-dated treasury yields from long-dated treasury yields. That's it. Traditionally, looking at the 10-year treasury minusing the two-year treasury gives you a depiction of the yield curve. And if that curve inverts, in other words, short-term treasuries paying a higher yield than long-term treasuries, that's an indication of an economic problem. That's an indication of economic health not being perhaps what it should be. And so an inverted yield curve has certainly happened many, many times in past. And the inverted yield curve doesn't necessarily 100% of the time manifest itself into a deep, verging recession, but it often does. And if you look at another elemental component, the 10-year treasury minus one-month treasuries, that gives you a spread or a yield curve structure that perhaps is a little bit more sensitive. And one of the things that we know for sure is that over the past 70 years, pretty good sample of time, over the past 70 years, there's never been an inverted yield curve where then it comes out of the inversion, which we're doing right now, by the way. Our economic structure is setting itself up with treasury yields, the way in which they're trading right now, where we are coming out of the inversion that was in place. And again, you can see that by just looking at the treasury yields. Current treasury yield for the two-year treasury is 4.279, roughly. Let's call it 4.2, 4.3, whatever you want to call it. The 10-year treasury is 3.85. All right, it's still inverted. Yes, but it's getting less of an inversion compared to where it had been at the depths of its inversion. The depths of its inversion was about 100 basis points inverted. Now it's about 30, 40, 44 basis inverted. OK, fine. It's coming out of inversion. And I know this, that in the last 70 years, there's never been a post-inversion equity market rally. Again, looking at the 10-1s that I just talked about a moment ago, that has not been more fully reversed going into a subsequent downturn or bear market. And we can go back and look at 56 to 57, 73 to 74, 2000 to 2002. We can go back again, farther 59 to 60, 65 to 66, 67 to 70. The big ones that most people remember, of course, are the 2000-2002 bear market, the 2019 to 2020 pandemic-induced bear market that came about, the 2006 to 2009 cycle, where we saw the inversion and then coming out of the inversion. What happened in every single one of these instances, except this one? The markets all rolled over and ended up hitting new bear market lows before they ultimately got into a real bull market phase. And all of those came with capitulatory style. I give ups. I can't take it anymore. Got to get out of the market. You know, all of those kinds of things are what people were thinking and saying. And so I'm not suggesting that we're just going to all of a sudden wake up tomorrow and be in crash mode again. What I'm saying is that this instance of what we're seeing in markets today has a number of historic components to it, not to mention how we're seeing manipulation take place inside. Whether the Federal Reserve is politicized or not, I don't know. I don't know that I care. All I know is that they've liquefied the system so much and given people the drug of free money for so long, it's been very, very hard for people to get over and get around that. So we've got to drop an M2, as I talked about at the beginning of the show, that is historic in nature. Questions become very, very focused on the 1974 to 1982 time frame as it relates to inflation, because it had a huge ramp in inflation from roughly 72 into the peak of 74, and then it fell back down into the trough of 76 and then it ripped higher. Higher than what it had been in mid-1970s, where ultimately we watched inflation peak at like 15% in 1980. If you overlay the current movement of inflation from 2014 until now, it's almost a mirror image of what took place from 1966 to roughly 1975 when looking at it from that cycle time basis. So I want you to recognize there are a lot of things happening in markets right now. Don't get lost in price. Don't allow yourself to get completely taken away by what's happening with price and it's the new narrative of the bull market and all that stuff with it. Be vigilant. I will do my best to try and help you week in and week out recognize what's going on with global asset markets and how they can affect your retirement and your assets. So again, we want to make sure and try and give you the knowledge and the tools to be able to see things coming before they happen, both good and bad. Well, we're out of time. Check us out online. careformywealth.com We'll see you next week.
