A Corrective Mania

George Floyd will be laid to rest in his hometown of Houston, Texas today. Floyd’s brutal death under the knee of a Minneapolis police officer touched off protests and rallies against racial and social injustice not only in the US but around the globe.

None of this would have happened, if this were not clearly documented on camera and the world could see it. There are probably many who died in much worse circumstances at the hands of people who are supposed to protect us, but we didn’t see them on film or hear their full story.

So, the collective consciousness of humanity has been forced to invoke actions to protect the minority and the downtrodden.

As in everything, somebody had to pay a price. So, let’s hope and pray that George paying the price with his life was worth it to bring in solid legislation to protect the innocent and punish the guilty.

Let’s turn to the markets. A global pandemic, protests, riots, arson, political divide like never before and nation – state cyberattacks have not put any dent to the stock markets. As the saying goes “what doesn’t kill you makes you stronger”.

Stocks are the least macro-sensitive asset class. They mostly react to the immediate bad or good news and it will be reflected in the price. Price is an advertising agent. Early stage political trends, central bank activity and broad economic developments don’t normally show up early in the stock market.

We can write essays on this and we will in the coming days. Let’s look at what is just ahead of us.

Equities

In recent past reports we have been discussing about the bullish extremes we are seeing at the CBOE equity put/call ratio and the rise in daily sentiment index. Since the markets topped out in mid Feb of this year the group of retail traders bought approximately 7.5 million call options in Feb alone. Last week they bought more than 12 million calls. History has not been kind to small retail traders. They are rarely rewarded handsomely for taking out sized risk. This fits well with our narrative that, what we are seeing is a corrective mania despite so many negative fundamentals.

The S&P 500 is just few points away from making another retracement of a 0.618 % down move at 3238. The window of 3238 to 3268 should stay critical.

Bonds

Markets are on track for our downside objectives but as we pointed out before we will see pullbacks. Yesterday, the markets met resistance at 174^15 and it can even extend to 176.

Euro

Think we have found a top in Euro at 1.1384. If we are right about it, we should start to see a long-drawn weakness in Euro lasting a few months.

Gold

There are two patterns in play in the gold. One argues for a move to 1800 before it tops out and the other says that a top could have been seen at 1766 on May 18. We will wait for more subdivisions to get a better picture.

Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.