Silver Breaks Out as Short Squeeze Takes Hold

iShares Silver Trust (SLV) is showing a clear breakout pattern, and the driving force appears to be a short squeeze. If this squeeze gains momentum, silver could climb to $70. The setup makes sense when you consider the supportive macro environment: quantitative tightening is ending, the Fed remains dovish, and rate cuts are on the table. All of these factors traditionally benefit precious metals.

But while silver is catching a bid, early trading action in stocks and cryptocurrencies tells a different story, and it all traces back to what's happening in Japan.

Japan's Rising Yields Create Ripple Effects

Bank of Japan Governor Ueda is hinting at a potential rate increase this month, and bond markets are responding. Japanese government bond yields are surging to levels not seen since the 2008 financial crisis. The two-year yield jumped 3 basis points to 1.02%, the five-year climbed 7 basis points to 1.3%, and the ten-year rose 7 basis points to 1.87%. The yen is strengthening alongside these moves.

Why does this matter for U.S. markets? Three big reasons.

First, countless funds have borrowed billions in Japan at rock-bottom rates and poured that money into the AI trade in America. If Japanese yields keep rising and the yen strengthens, this carry trade faces serious unwinding pressure. Second, there's a massive, long-standing trade where funds borrow in Japan to buy U.S. bonds. This trade could also reverse. Third, Japanese institutions have been huge buyers of U.S. Treasuries. Higher yields at home might not just stop them from buying more Treasuries but could actually trigger selling.

Here's the uncomfortable possibility: long-term U.S. yields could rise even if the Fed cuts interest rates. American markets aren't prepared for two scenarios in particular—the carry trade unwinding and long-term yields climbing despite Fed cuts.

A Contrarian Call That Proved Prescient

Back in September 2024, when almost everyone was rushing to buy long bonds ahead of anticipated Fed rate cuts, a contrarian call predicted that long-term rates would actually rise if the Fed cut by 50 basis points. At the time, it seemed counterintuitive. But that's exactly what happened. The Fed cut the funds rate from 5.25%-5.50% to 4.75%-5.00%, and the ten-year yield climbed from the mid-3% range to 4.3%, defying consensus expectations.

Year-End Crosscurrents Pull in Both Directions

As we head into year-end, the stock market faces competing forces. Whichever direction starts to dominate, expect Wall Street's algorithmic trading machines to pile on and exaggerate the move.

On the positive side, several factors could support stocks. Quantitative tightening ends today, which will increase liquidity and help risk assets. Underperforming money managers will chase performance by aggressively buying top-performing stocks. There's an estimated 70% probability of a Fed rate cut this month (though consensus sits closer to 90%). Seasonality favors stocks, volatility is declining heading into December, and positioning is no longer stretched.

But the negatives are substantial. Inflation data continues running hotter than expected. If the Fed does cut rates in a 3% inflation environment while liquidity is already high and the stock market hovers near record levels, it could raise serious questions about the Fed's commitment to fighting inflation. Alternatively, the Fed might not cut at all, or could adopt a hawkish stance on future cuts. And those rising yields in Japan? If they climb further, the carry trade could blow up spectacularly.

Adding to the uncertainty, President Trump has reportedly decided on the next Fed chair. The announcement and subsequent speeches could be a double-edged sword, either sending stocks soaring or triggering concerns about Fed independence.

Crypto and Stocks Move in Tandem

Cryptocurrencies and the stock market have become increasingly linked. Many investors heavily positioned in crypto are also deep into AI stocks, often with significant leverage. That means moves in Bitcoin (BTC) and other digital assets will reverberate through the AI trade. Bitcoin is seeing selling pressure in early trading as those Japanese yield concerns spread across risk assets.

Blind Money and the Momo Crowd

Expect "blind money" to flow into stocks today and tomorrow. This is the capital that automatically enters the market on the first two days of each month regardless of conditions or analysis. Meanwhile, the momentum crowd is aggressively buying the early morning dip caused by rising Japanese yields.

The AI Trade Is Shifting

Alphabet Inc. (GOOG) stock has surged on the release of Gemini 3 and growing excitement about Google's tensor processing unit technology. But there are widespread misconceptions about what this means.

Large language models will likely leapfrog each other in cycles. Google using custom TPUs in its own models and environment is very different from Google becoming a dominant vendor selling TPU chips to other companies running different models. The prediction that custom ASICs would give serious competition to NVIDIA Corp (NVDA) has been voiced for three years now. The market is only just waking up to this reality.

Venezuela Developments

President Trump has stated that airspace around Venezuela should be considered closed. If the U.S. takes military action against Venezuela, expect the stock market to rally.

Taiwan Risk on the Horizon

Prudent investors should note that 2027 marks the 100th anniversary of the founding of China's People's Liberation Army. Concerns are building that China might attack Taiwan to celebrate the anniversary and for domestic political reasons. Such an attack would devastate global stock markets if the U.S. comes to Taiwan's defense. However, speculation is also growing that in exchange for trade concessions from China, the U.S. might not intervene.

Taiwan matters enormously because chip manufacturing is concentrated there. If Taiwan Semiconductor Manufacturing Co. (TSM) operations face disruption, it could be devastating for the AI trade, though potentially positive for Intel Corp (INTC).

Magnificent Seven Money Flows

Most portfolios are now heavily concentrated in the Mag 7 stocks, making daily money flow analysis critical. In early trading, money flows are negative across Amazon.com, Inc. (AMZN), Nvidia, Microsoft Corp (MSFT), Alphabet, Meta Platforms Inc (META), Tesla Inc (TSLA), and Apple Inc (AAPL).

Money flows are also negative in SPDR S&P 500 ETF Trust (SPY) and Invesco QQQ Trust Series 1 (QQQ).

Smart Money Positioning

Investors can gain an edge by tracking money flows in SPY and QQQ, but an even bigger advantage comes from knowing when smart money is buying stocks, gold, and oil. Popular tracking vehicles include SPDR Gold Trust for gold, silver ETF (SLV) for silver, and United States Oil ETF for oil.

Strategic Positioning Recommendations

Consider holding quality long-term positions while maintaining a protection band consisting of cash, Treasury bills, or short-term tactical trades along with hedges. The appropriate level depends on individual risk tolerance and time horizon. Older or conservative investors should lean toward higher protection bands, while younger or aggressive investors can operate with lower bands. If you're not using hedges, cash levels should be higher than if you were hedging, but still significantly below a combined cash-plus-hedges approach.

A protection band of 0% represents a very bullish stance with full investment and no cash. A protection band of 100% signals extreme bearishness requiring aggressive protection through cash and hedges or short positions.

Remember that you can't capitalize on new opportunities if you're not holding adequate cash. When adjusting hedge levels, consider using partial stops for individual stock positions and wider stops on remaining quantities, particularly for high-beta stocks that move more than the broader market.

Traditional Portfolio Considerations

Probability-based risk-reward analysis adjusted for inflation doesn't favor long-duration strategic bond allocations right now. Investors committed to a traditional 60% stock and 40% bond split should focus on high-quality bonds with durations of five years or less. More sophisticated investors might consider treating bond ETFs as tactical positions rather than strategic holdings in the current environment.