The S&P Nifty fell last week. Indicators are bearish for the week. Markets are topping. We are transitioning from an inflationary regime to a deflationary one. The sentiment is bearish, and risk-reward is poor at these levels as divergences develop. Carry trade liquidation may resume even as we enter a seasonally strong period. The Nifty has corrected from recent highs and will likely underperform going forward.

The past week saw US equity markets fall. Most emerging markets fell as interest rates rose. Transports fell. The Baltic dry index fell. The dollar rose. Commodities fell. Valuations are expensive, market breadth fell, and the sentiment is bearish. Fear (S&P 500) rose.

After this rally, a currency crisis should resume and push risky assets to new lows. Despite the recent inflationary spike, deflation is in the air, and bonds are telegraphing just that. It feels like a 2008-style recession trade has begun, with a potential for a decline in risk assets across the board. The current market is tracking closely the 2000 moves down in the S&P 500, implying a panic low right ahead in the upcoming months (My views do not matter; kindly pay attention to the levels). A dollar rebound from significant support is a likely catalyst.

The S&P 500 is near all-time highs. We have bounced from recent lows without capitulation. This suggests the lows may not be in, and the regime has changed from buying the dip to selling the rip. We may get a final flush down soon. Risky assets should continue breaking to the downside as earnings growth peaks. The Fed has aggressively tightened into a recession. Deflationary busts often begin after major inflationary scares. After correcting significantly, the market has made new highs, and more is left on the downside. The Dollar, commodities, and bond yields are flashing significant warning signs.

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 Global yield curves have steepened after inverting significantly, reflecting a major economic slowdown. The recent steepening of the yield curve, within an inverted context, with rates falling, is a precursor to the next recession, and the riskiest assets will underperform going forward under such conditions. 

The critical levels to watch for the week are 5945 (up) and 5920 (down) on the S&P 500 and 23700 (up) and 23500 (down) on the Nifty. A significant breach of the above levels could trigger the next big move in the above markets.  High beta / P/E will get torched again and likely be a sell on every rise. Gold increasingly looks like the asset class to own over the next decade. (Gold exploded almost eight times higher over the decade following the dot-com bust in 2000. Imagine what would happen when this AI bubble bursts? following the recent crypto bubble burst) You can check out last week’s report for a comparison. Love your thoughts and feedback. Merry Christmas.

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