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The S&P 500 and the Nifty rallied last week. Indicators are bullish for the week. Markets have bottomed, as we enter bullish seasonality.  The Nifty will likely catch up to the upside soon. We are transitioning from an inflationary regime to a deflationary collapse.

The past week saw a big risk-on move, in which US equity markets rallied hard. Most emerging markets rose, as interest rates fell. Transports led the move up. The Baltic dry index fell. The dollar fell. Commodities fell. Valuations continue to be quite expensive, market breadth rebounded, and the sentiment is still bearish. Fear abated quite a bit this week, as a possible reality check from a FED Pivot looms.

After this rally, 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. 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 major support is a likely catalyst.

The S&P 500 is encountering resistance near its recent highs. 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 has aggressively tightened into a recession. Deflationary busts often begin after major inflationary scares. The market has rebounded after correcting significantly, and more is left on the downside. The Dollar, commodities, and bond yields continue 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.

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 the riskiest 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 4370 (up) and 4345 (down) on the S&P 500 and 19300 (up) and 19150 (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 will likely prove to be a sell on every rise. Gold is increasingly looking like the asset class to own over the next decade. (Gold exploded almost 8 times higher over the decade following the dot-com bust in 2000, just 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.

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