The S&P and the Nifty rallied last week. Indicators are mixed for the week. Deflation is in the air. Markets are failing at new highs amid loads of divergences and a big move beckons in a seasonally weak period for risk assets. Earnings revisions have been very good but it is already in the price. Typical late-cycle Fed put stuff is leading to a taper tantrum and an imminent top. Tail risk has skyrocketed with the Skew/Vix ratio recently touching double digits. The market is about to begin an epic correction. Deflationary busts often begin after inflationary scares (the market is calling the Fed’s bluff) and long bonds are telegraphing just that. Transports, the Dollar, market breadth, commodities, and the skew are flashing major warning signs. The epic correction signal is alive and well with retail, hedge funds, and speculators all in, despite the recent melt-up, suggesting a major top is imminent. The moment of reckoning is very near.  Technicals are about to track fundamentals and turn bearish. The market is yet to price in one of the worst earnings decline periods in stock market history. With extremely high valuations, a crash is on the menu. Extremely low volatility suggests complacency and downside ahead.

We rallied 46% right after the great depressions (1930’s) first collapse and we have rallied over 100% in our most recent rally of the lows in the last 12 month period. After extreme euphoria for the indices, a highly probable selloff to the 3900 area is emerging on the S&P, and 13000 should arrive on the Nifty in the next few months. The Fed is repeating the Japan experiment and the 3 lost decades in Japan (1989-2019) are set to repeat across the globe. SPX 1800 and lower in a year and we stay there till 2030, scary? The markets are very close to an epic meltdown and the SPX is headed way lower.

The markets are overvalued, overbought and out of touch with economic realities. Long term, the epic meltdown is set to continue resulting in a 5 year plus bear market with lot lower levels that may be as low as 800 on the S&P. QE forever from the Fed is about to trigger the deflationary collapse of the century as we make a major top in global equity markets. The market is looking like the short of a lifetime with topping action in the transports, other global indices, and commodities. High valuations continue.

The recent global virus epidemic (black swan) has dented global GDP significantly and will usher in depression much faster than most think. The trend is about to change from bullish to bearish and the markets are about to get smashed by a rebounding dollar. Looking for significant underperformance in the Nifty going forward on rapidly deteriorating macros. A 5-year deflationary wave has started in key asset classes like the Euro, stocks, and commodities amidst several bearish divergences and overstretched valuations.

We are entering a multi-year great depression. The markets are still trading well over 3 standard deviations above their long-term averages from which corrections usually result. Tail risk has been very high of late, as interest rates are plunging yet again leading into a major recession. The critical levels to watch for the week are 4450 (up) and 4425 (down) on the S&P 500 and 16300 (up) and 16150 (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 is about to get torched soon (despite the bullish consensus emerging).