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Ahead of the Curve provides analysis and insight into today's global financial markets. The latest news and views from global stock, bond, commodity, and FOREX markets are discussed. Rajveer Rawlin is a PhD and received his MBA in finance from the Cardiff Metropolitan University, Wales, UK. He is an avid market watcher, having followed capital markets in the US and India since 1993. His research interests include capital markets, banking, investment analysis, and portfolio management, and he has over 20 years of experience in the above areas, covering the US and Indian markets. He has several publications in the above areas. He currently teaches business and management students at CHRIST University. The views expressed here are his own and should not be construed as advice to buy or sell securities.

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Monday, 15 May 2023

Market Signals for the US stock market S and P 500 Index and Indian Stock Market Nifty Index for the Week beginning May 15

 

Asset Class

Weekly Level / Change

Implication for S & P 500

Implication for Nifty*

S & P 500

4124, -0.29%

Neutral

Neutral

Nifty

18315, 1.36%

Neutral **

Bullish

China Shanghai Index

3272, -1.86%

Bearish

Bearish

Gold

2016, -0.44%

Neutral

Neutral

WTIC Crude

70.09, -1.75%

Bearish

Bearish

Copper

3.73, -4.08%

Bearish

Bearish

CRB Index

258, -1.41%

Bearish

Bearish

Baltic Dry Index

1558, 0.00%

Neutral

Neutral

Euro

1.0850, -1.52%

Bearish

Bearish

Dollar/Yen

135.71, 0.65%

Bullish

Bullish

Dow Transports

13783, -2.41%

Bearish

Bearish

Corporate Bonds (ETF)

108.32, -0.20%

Neutral

Neutral

High Yield Bonds (ETF)

91.32, -0.36%

Neutral

Neutral

US 10-year Bond Yield

3.46%, 0.81%

Bearish

Bearish

NYSE Summation Index

-29, -138%

Bearish

Neutral

US Vix

17.03, -0.93%

Bullish

Bullish

Skew

140

Bearish

Bearish

CNN Fear & Greed Index

Greed

Bearish

Bearish

20 DMA, S & P 500

4126, Below

Bearish

Neutral

50 DMA, S & P 500

4058, Above

Bullish

Neutral

200 DMA, S & P 500

3975, Above

Bullish

Neutral

20 DMA, Nifty

17969, Above

Neutral

Bullish

50 DMA, Nifty

17580, Above

Neutral

Bullish

200 DMA, Nifty

17743, Above

Neutral

Bullish

S & P 500 P/E

23.87

Bearish

Neutral

Nifty P/E

21.82

Neutral

Bearish

India Vix

12.85, 4.53%

Neutral

Bearish

Dollar/Rupee

82.26, 0.68%

Neutral

Bearish

 

 

Overall

 

 

S & P 500

 

 

Nifty

 

Bullish Indications

4

6

Bearish Indications

12

12

 

Outlook

Bearish

Bearish

Observation

 

The S&P 500 was unchanged and the Nifty rallied last week. Indicators are bearish for the week.

The markets are back at resistance. Watch those stops.

On the Horizon

Eurozone – CPI, UK – Employment data, Japan – GDP

*Nifty

 

India’s Benchmark Stock Market Index

Raw Data

Courtesy Stock charts, investing.com, multpl.com, NSE

**Neutral

Changes less than 0.5% are considered neutral

 


The S&P 500 was unchanged and the Nifty rose last week. Indicators are bearish 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 17700. 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 a likely catalyst. This could be the week of decisive downside.

The past week saw US equity markets unchanged. Most emerging markets fell, as interest rates rose. Transports diverged lower. The Baltic dry index was unchanged. The dollar rose. Commodities fell. Valuations continue to be quite expensive, market breadth fell, and the sentiment is now bullish. Fear has cooled off again, despite possible contagion risk from bank failures.

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 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 despite recent countertrend moves.

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 15000 should arrive on the Nifty in the next few months. The Nifty is catching up with other assets on the downside.

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 4135 (up) and 4110 (down) on the S&P 500 and 18400 (up) and 18250 (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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My Asset Allocation Strategy (Indian Market)

Cash - 40%
Bonds - 20%
Fixed deposit - 20%
Gold - 5%
Stocks - 10% ( Majority of this in dividend funds)
Other Asset Classes - 5%

My belief is that stocks are relatively overvalued compared to bonds and attractive buying opportunities can come along after 1-2 years. In a deflationary scenario no asset class does well other than U.S bonds, the U.S dollar and the Japanese yen, so better to be safe than sorry with high quality government bonds and fixed deposits. Cash is the king always. Of course this varies with the person's age.