Our Positioning Going Into 2024

As the new year begins, we thought it’d be a good time to present our outlook for 2024 and how we’re positioning ourselves in our ratings.

While we still expect a U.S. recession in 2024, the exact timing is very difficult to predict. Jobless claims aren’t yet rising as aggressively as we’d expect following 2022’s yield curve inversion.

As a result, we may have to push our recession timeline to the second-half of 2024, as it could take more time for the negative impact of higher interest rates to really be felt in the economy.

As the economy begins to enter a recession, we expect U.S. megacap stocks will be the most vulnerable:

• Their high valuations make their potential downside bigger
• Historically, expensive stocks see their valuations deflate during recessions
• They make up a large portion of the S&P 500, so their underperformance would be a big drag for the market as a whole

While we find U.S. stocks very expensive, we’re not excluding the possibility that valuations could still expand further in the first-half of 2024 in a euphoric move:

• Melt-ups occur more frequently near the end of the business cycle
• They tend to develop when the Fed pivots without signs of an imminent recession
• The increasing consensus around a soft landing leads to FOMO investor behavior

With these risks in mind, our asset allocation approach in today’s late-cycle environment is based on 3 key exposures:

• Assets that would melt-up in a recession, but would also outperform if the economy merely cools down (long: TLT, GLD, SLV, GDX, XLU; short: Oil)
• Diversified ideas that are uncorrelated with expensive U.S. equities and offer substantial risk-reward opportunities (i.e., long: MCHI, URA, Copper)
• Calculated bets with significant upside to a Fed pivot but without taking excessive risks (long: Ethereum, RSPT)

There have been a few developments since our last ratings update that are worth mentioning:

• Upgrading MCHI to a Buy rating of 7 as price broke out a short-term trendline after holding up a key level long-term support
• Upgraded URA to a Buy rating of 6 in a Flash Update on Friday , on the back of a technical gap-down which could be filled in short order
• Discontinuing TUR from the ratings report given loss in conviction, as we mentioned last week

Ratings:

Assets:

Gold Miners (GDX ETF)

Rating = Buy (7)

• We’ve been bullish on GDX since early-November when it was trading at $27. We benefited from the Fed pivot propelling precious metals higher, as GDX has been playing out a head-and-shoulders pattern with a target of $34.
• While we remain constructive on GDX given the favorable macro backdrop of a Fed pivot, we’ve turned more cautious on gold in recent weeks. We see vulnerabilities in the yellow metal that pose a risk for the miners.
• Moreover, our concerns around stocks (see the S&P 500 section), adds another risk to GDX given how important breadth is for GDX’s returns. We remain positive on GDX unless we break below the $29.37 level.

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Chinese Stocks (MCHI)

Rating = Buy (7)

• We’re upgrading MCHI to a 7 from a 6 given that it’s rebounded off long-term support at $39 and it’s now breaking out of a short-term trendline. We’d turned more bullish on Chinese stocks in recent weeks as they were trading near a potential inflection point.
• There’s no clear macro catalyst driving the recent rebound and the price trend remains down. We’d need to see MCHI clear the longer-term downtrend line and the moving averages to acknowledge a turning point in Chinese stocks.
• A breakdown of the $39 level would see us revert our rating to a neutral stance, as it’d increase the probability of Chinese stocks turning into value traps.

• Real money supply growth (M1) in China can help predict cyclical turning points in economic activity as captured by the Li Keqiang Index. The latter is a composite annual growth measure of 3 indicators: bank lending, electricity production and rail freight.
• Momentum in M1 real growth looks unimpressive today, implying little upside for cyclical strength in China in the short-term. While that may not sound like good news, it could help force the authorities to once-and-for-all deploy big fiscal stimulus to turn the economy around.

Uranium Miners (URA ETF)

Rating = Buy (6)

• In a Flash Update on Friday, we upgraded URA to a 6 from a neutral rating following its ex-dividend gap down last Thursday. There’s potential for that gap to be filled quickly. Please refer to the Flash Update for the details.

• We’d been bullish on URA in recent months, but had downgraded to a neutral stance in late-November given it was at channel resistance, where it saw big rejections and stalled.
• URA remains significantly undervalued relative to the uranium spot price, and hence see this technical gap-down as an opportunity to get long at a much more favorable risk-reward.
• We believe URA has long-term potential as a bet on the green energy transition as demand for nuclear power generation exceeds tight supply.

S&P 500 Index

Rating = Neutral (5)

• The risk-reward for the S&P 500 has increasingly worsened as price inches toward key resistance. It looks overextended and the low put/call ratio suggests investor complacency. That explains our lack of enthusiasm for U.S. equities and hence our neutral rating.
• Stocks are likely to consolidate here at the very least, and we’re better off with more calculated bets on a Fed pivot like with Ethereum and RSPT, where the downside risk is much lower.

• We also found VIX divergence with the S&P 500, as stocks are making higher highs and the VIX lower lows. That signal has helped anticipate near-term market tops.
• We’ll be monitoring the S&P 500’s behavior as it approaches channel resistance. The negative signal from various indicators would likely see us revert to a Sell rating if it re-tests resistance.

Silver (SLV ETF)

Rating = Buy (7)

• We’ve been very bullish on SLV (Strong Buy at 8) when it was at $20 in early-November as a bet that the dollar would weaken in a Fed pivot. However, we’re getting a bit cautious given that the Gold/Silver ratio is now testing resistance, as we show in the report’s section on GLD below.
• We’re also paying close attention to the dollar given potential for it to reverse higher from nearly oversold levels, following a decline of 5% over the last 2 months (see next section).
• The head-and-shoulders on SLV that we highlighted in recent reports still has a good chance of working. It’d activate once the economic data begins to deteriorate, pushing the dollar lower.
• However, given our recent concerns around the Gold/Silver ratio and the dollar, we’re raising our stop-loss to $21 from $20, which coincides with the trendline support that captures the October and December lows.

• As we had highlighted in last week’s ratings report, we don’t see a big dislocation between the dollar and silver today that’d imply significant downside risks for silver today.
• However, the technicals for the dollar index (DXY) do warn of a potential rebound off key support that would drag precious metals lower, particularly silver given its high sensitivity to it.
• Following the dollar’s big run-up since mid-2021, it’s possible that the greenback enters a consolidation range similar to 2015’s following the rally. As a result, support and resistance levels could prove important in assessing the dollar’s moves in coming months.

Gold (GLD ETF)

Rating = Buy (6)

• We’ve been gradually getting much less bullish on gold in recent weeks, transitioning from a Strong Buy rating of 8 when GLD was at $180 in early-November, to a 6 where it stands today.
• Gold’s big dislocation with real rates, that we highlighted in our most recent Macro Newsletter, is concerning.
• Moreover, the dollar looks close to oversold and testing resistance as we discussed in the section for SLV. A strengthening dollar is a negative for gold.
• We remain cautiously optimistic on GLD given the favorable macro environment of a Fed pivot. However, like the case with SLV, we’re also raising our stop-loss for gold to $187.50 from $180 to better manage these more recent risks.

• We’re monitoring the Gold/Silver ratio as it looks poised to re-test resistance. A breakout in the ratio would be bearish for precious metals and could prove an inter-market signal invalidating the bullish case for precious metals, at least in the near-term .

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Ethereum

Rating = Strong Buy (8)

• Ethereum is one of our calculated bets on a Fed pivot. We’re confident it’ll outperform stocks and Bitcoin in any potential melt-up.
• Moreover, unlike stocks, Ethereum doesn’t look overpriced, so there’s not a lot of downside risk if a recession where to materialize.
• We’ve set a tight stop-loss at a weekly close below $2,100. If it drops below that price, we’ll likely scale back to a neutral stance while we wait for a more favorable setup to develop.

• The ETH/BTC ratio saw a big rebound off important trendline support last week. That was driven by Ethereum’s significant outperformance relative to Bitcoin, something we alluded was imminent in our last ratings report given the ETH/BTC ratio proximity to key support.
• That corroborates our view that altseason has likely begun and increases our conviction for favoring ETH over BTC.

Bitcoin

Rating = Neutral (5)

• Like the S&P 500’s setup, Bitcoin also looks overextended and it’s trading near channel resistance. It’s possible that it makes another run for it near the $48k level, where we’d consider downgrading our Neutral stance to a Sell.

• Bitcoin dominance broke down trendline support last week, signaling that altseason has likely begun.
• The reversal in dominance happened before BTC hit channel resistance. It’s possible that this was a highly-watched level and traders front-ran the move, leading to an early-reversal.
• It’s possible that the breakdown in dominance will prove a false if Bitcoin makes another run at the $48k level. That’d lead dominance to form a double-top before altseason sees a real start.