The S&P 500 and the Nifty rose last week. Indicators are bullish for the week. Markets are topping and about to collapse. We are transitioning into a deflationary regime, and the risk of a recession has increased significantly. The sentiment is fearful. Carry trade liquidation is about to resume, and the S&P 500 will likely find resistance soon, as we enter bearish seasonality till the end of October. The macroenvironment was already deteriorating rapidly even before the recent tariff issue. The recent massive breakdown in transports (subsequent non-conformation for a possible second time) is quite ominous. Divergences galore. This, combined with oil's recent free fall, has profound recessionary implications. The Nifty has corrected significantly from its recent highs and is likely to underperform in the near future.

The past week saw US equity markets rise. Most emerging markets rose as interest rates fell. Transports rose. The Baltic Dry Index rose. The dollar was unchanged. Commodities were little changed. Valuations are expensive, market breadth fell, and sentiment is fearful. Volatility (S&P 500) fell.

A currency crisis should resume at any moment and push risky assets to new lows. Deflation is in the air, and bonds are telegraphing just that despite intermittent spikes in yields. 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 closely tracking the 2000 moves down in the S&P 500 500, implying a panic low is right ahead in the upcoming months. (My views do not matter; kindly pay attention to the levels.) A dollar rally is a likely catalyst.

The S&P 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 are likely to continue breaking to the downside as earnings growth falters. The Fed is now easing, anticipating a recession. Deflationary busts often begin after major inflationary scares. The Dollar is at major lows, while commodities and bond yields are flashing significant warning signs.

Global yield curves are steepening after having inverted a second time, reflecting the arrival of a significant economic slowdown. This is a precursor to the next recession, and the riskiest assets are likely to underperform in the future under such conditions. 

The critical levels to watch for the week are 6675 (up) and 6650 (down) on the S&P 500 and 25800 (up) and 25600 (down) on the Nifty. A significant breach of the above levels could trigger the next major move in these markets.  High beta/P/E will get torched again and is a sell on every rise. Gold increasingly looks like the asset class to own over the next decade (has gone parabolic of late). Gold exploded almost eight times higher over the decade following the dot-com bust in 2000. Imagine what would happen to gold when 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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