Updated: Aug 17, 2020
1. Where to from here? A traders market as we go "Up & Down, Round & Round" USD & Gold the likely winners to year end. The SGD & China winners longer-term. Market momentum & breadth indicators are starting to roll following the sharp rebound from mid-March lows - a high degree of complacency has returned to risk assets and a generation of "buy the dip" investors hope for further gains... History has taught us to follow the earnings trajectory and facts - equity markets have a strong corelation with earnings growth over the long-term, but can deviate significantly in the short-term. The S&P500 has been jacked up on the Feds QE rocket fuel and US govt fiscal stimulus measures (will the dollar be worth anything in 3yrs? who knows?) - it is one of the few markets that has rallied back through its 50 moving day average (MDA) and is stuck in a consolidation zone bwtn the 50MDA & 200MDA. Other markets have largely followed the typical "bear market" rally pattern ie. Recover half of crash losses and find resistance at the 50 MDA. Uncertainty and the earnings hole created by COVID19 is far from over, but a few other factors have caught the eye and warrant attention as the equity market "Risk/Reward" is now tilted modestly to the downside again: 1.) China-US tensions resurface - this is a lot more important than COVID19 longer-term. If China hit the brakes (to save themselves) it is game over. Trade deal requirements are not being met and Trump playing the blame game as his great economy rolls. Trump is losing face and now trying to rally nationalistic support into the elections. 2.) US elections - recent polls indicate Biden gaining support and pulling clear in key swing states that won president Trump his first term. Trump was a shoo-in prior to the COVID19 crisis (80% chance), now the race looks like a toss up. A bit of Game Theory comes into play here, watch the Chinese response, do they want a Trump 2nd term or the potentially worse Democrats to fight. Rising tensions remain inevitable. A Democrat victory would be relatively worse for markets - Trump has kept a close eye on the S&P and often boasted his success in relation to its performance. 3.) Europe & Emerging Markets (ex-China) - the dysfunctional structure of the European Union has left its COVID19 reponse lacking. Emerging markets are bust, the IMF bag isn't big enough to save the day, large currency devaluations already underway. 4.) Credit risk - A No-to-Low default scenario lasting forever only happens in the land of unicorns... defaults and bankruptcies are coming, this has been partially plugged by central bank measures, but they can not cover all the holes. The domino effect of suffering households + SMEs will cascade through the economy and up the cap curve. Bank stock prices have not recovered, a telling sign defaults are likely underestimated. Many European banks trading at half of book value. 5.) The rise of populism... Demographics... a generational turn - Longer-term structural shifts which a crisis could accelerate. Debt forgiveness most likely needed, wealth taxes coming, currency devaluations coming (esp relative to Gold). The CNN Fear & Greed Index - available for free https://money.cnn.com/data/fear-and-greed/ - failed to break through the neutral ground and is slowly slipping back to a "mild fear" territory. Extreme fear likely to mark the next trading bottom again (the index was at a low of 2 on 23Mar20).
Market Breadth improved, but now starting to plateau - strong turning point indicator usually.
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