The S&P 500 was up and the Nifty was down last week. Indicators are bullish for the week. Markets are topping. We are transitioning from an inflationary regime to a deflationary one. The sentiment is fearful, and risk-reward is poor at these levels as divergences develop. Carry trade liquidation may resume in short order, and the S&P is due for a trip to the 200 DMA near 5700. Markets have bounced from oversold levels, and rallies may terminate soon on the S&P. The Nifty has corrected significantly from recent highs and will likely underperform.

The past week saw US equity markets rise. Most emerging markets rose as interest rates were little changed. Transports rose. The Baltic dry index fell. The dollar fell. Commodities rose. Valuations are expensive, market breadth has risen, and the sentiment is fearful. Fear (S&P 500 500) abated.

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 500 500, implying a panic low right ahead in the upcoming months (My views do not matter; kindly pay attention to the levels). A dollar rally is a likely catalyst.

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The S&P 500 500 is correcting from recent 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. The Dollar, commodities, and bond yields are flashing significant warning signs.

Global yield curves have steepened after inverting significantly, reflecting a significant 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 6130 (up) and 6100 (down) on the S&P 500 500 and 23000 (up) and 22850 (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 as this AI bubble bursts. You can check out last week’s report for a comparison. I love your thoughts and feedback.

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