The S&P 500 rose and the Nifty fell last week. Indicators are marginally bullish for the week. We are back above resistance near the 50 and 200 DMAs on the S&P 500, as we transition from an inflationary regime to a deflationary collapse. The Nifty is above the 20 WMA close to 17750. The current market is tracking closely the 1973/2008 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 major support is the likely catalyst. This could be the week when the downside resumes.

The past week saw US equity markets rally. Most emerging markets rallied, even as interest rates rose. Transports were up but under-performed. The Baltic dry index fell hard. The dollar rose. Commodities rose. Valuations continue to be quite expensive, market breadth fell, and the sentiment is now bullish. Fear has cooled off again, despite possible risk from a debt ceiling standoff.

The recent currency crisis should resume and push risky assets to new lows across the board. Deflation is in the air despite the recent inflationary spike and bonds are telegraphing just that. Feels like a 2008-style recession trade has begun, with a potential for a decline in risk assets across the board.

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The S&P 500 is encountering resistance near its recent highs. Monthly MACDs on most global markets are still negative. This spells trouble and opens significant downside risk ahead. We have got bounces 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 across the board, as downward earnings revisions are underway.

The Fed is aggressively tightening into a recession. Deflationary busts often begin after major inflationary scares. The market has corrected significantly, and more is left on the downside. The Dollar, commodities, and bond yields are continuing to flash major warning signs.

The epic correction signal occurred with retail, hedge funds, and speculators all in, in January 2022, suggesting a major top is in. The moment of reckoning is here. With extremely high valuations, a crash is on the menu. Low volatility suggests complacency and downside ahead.

We rallied 46% right after the Great Depression (the 1930s) first collapse and we rallied over 120% in our most recent rally of the COVID-19 lows. After extreme euphoria for the indices, a highly probable selloff to the 3300 area is emerging on the S&P 500, and 16000 should arrive on the Nifty in the next few months.

The trend has changed from bullish to bearish and markets risk getting a reality check and smashed by contagion risk from an economic slowdown and a strong dollar. Global yield curves have inverted significantly reflecting a major upcoming recession. The recent steepening of the yield curve, within an inverted context, with rates falling, is a precursor to the next recession, and most risky assets will underperform going forward under such conditions. Looking for significant underperformance in the Nifty going forward on challenging macros.

The critical levels to watch for the week are 4205 (up) and 4180 (down) on the S&P 500 and 18300 (up) and 18100 (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 yet again and will likely prove to be a sell on every rise. Gold (though technically overbought in the short term) is increasingly looking like the asset class to own over the next decade. You can check out last week’s report for a comparison. Love your thoughts and feedback.

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