Andy Krieger's Thoughts on the Market - 4 December 2023

Here is another brief update before a longer write-up in several weeks. In my analysis of November 19, 2023, I had written that we were likely in the early stages of a major, new rally in gold. The recent price action confirms this view, with gold having exploded higher from $1810 to touch $2146 per ounce in early Asia this morning. The move has been powerful, but it is over-extended in the short term. Accordingly, I am expecting a corrective pullback here, but the overall trend should now be intact.

In my experience, markets can either correct through time or price, or through some combination of them both. If I were to guess about the formation of the coming correction, I would expect this correction to be relatively sharp price-wise, but short-lived. After this corrective period is done, the next rally should be just as powerful as this recent move, perhaps even stronger. We just need to be patient and let this short-term overbought condition work itself off.

In terms of the dollar, we have now seen a fierce rally in the euro and the pound of six cents and seven cents, respectively. These moves are also over-extended in the short term, and some corrective price action is almost certain now. I want to see how the moves develop over the coming days, but the next several percent in most major currencies should see the dollar start to recover. I am on the fence regarding the bigger picture right now as the fundamentals are murky. I think the best strategy right now is to focus on shorter term moves that capture two and three percent moves.

Regarding the yen, I have been fighting the yen’s weakness recently as I had underestimated the market’s ability to pile such massive exposures into the short yen bet. The market has built up staggeringly large, short yen exposures, betting on a stable to weaker yen over the long term in order to capture the substantial interest rate differential between Japan and the U.S. In typical fashion, the market has put its blinders on, ignoring a host of other factors. Do I still feel that in the bigger picture the yen will see a major appreciation against the dollar and other currencies? It is likely. The price action around the prior highs of 151.90 evidenced a market that was tired and overdone. It is still too early to say the yen’s period of weakness is done, but the early warning signals for a big reversal are there.

Stocks in November were wild. The market LOVES the idea that the Fed will start cutting rates by the end of March, and they are pricing this into the equity valuations. What is somewhat amusing about this scenario is the market never really priced the Fed’s 500-basis point rate hikes into the stock market. Short-term, it is almost certain that the stocks will see some weakness here in early December. At a minimum, I am expecting at least a 4% or 5% sell-off in the Nasdaq from the market’s close this past Friday. In the S&P, I am expecting the correction to be a bit smaller on a percentage basis.

What the market is not pricing in is the complicated job the Fed has in store. If the Fed starts cutting rates too soon, they could very well trigger a sharp pick-up in inflation. The risk of rate cuts undermining the Fed’s job of guiding inflation back towards its 2% target is high. The employment market is still strong, and although people are starting to use more of their credit facilities to support their lifestyle, the overall health of the consumer is solid.

I will write again soon. Until then, I wish you all the best of luck with your trading.