The markets turned down sharply yesterday. The mainstream media narrative is that Wall Street is worried about the latest spike in COVID-19 cases. Really? The reasoning doesn’t make much sense. Wall Street ignored the rising infection rates when the markets were going up. So why should yesterday’s news make that much of a difference.
As we outlined in the last report, markets are waking up to the expiry of the pandemic unemployment benefits, eviction reprieves, student loans and cash for small businesses. Many of them are expiring next month. There is no clarity on whether they are going to be renewed or would new measures be put in place. The Congress seems to be stalling on the idea of additional stimulus payments. People will look up to the Fed for more guidance.
In other news, IMF has a worsened global outlook. IMF expects a contraction of 4.9% this year. Due to the recent standoff between India and China, all products that are made in or originating from China will be labelled accordingly. By the way, Jack Ma is no longer the richest man in China. It is Pony Ma, the founder of Tencent. Putin is trying to make constitutional changes to stay on in power till 2036.
Equities
The psychology of a bearish corrective up move is to suck you in and make you believe that the market is still in an uptrend. We have given you umpteen evidence why this is a suckers’ rally.
What we did not mention before is that the major two indexes (Dow and S&P) has left an island reversal at the top on June 8th. Island reversals happen when markets trade to a high or a low with gaps at both ends. Normally they are trend reversal patterns.
Small retailer call buying is at an extreme. Extreme sentiment can remain extreme for a longer time than each of us can imagine. The fact that NASDAQ is trying to make new highs on every opportunity when others have stalled is added indication to be careful. In the coming days the force should be with you for the downside.
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Bonds
The sideways trading in bonds continues unabated. As mentioned before the high on Apr 22 at 183^02 and the low at 170^03 on Jun 05 are the watershed levels to watch.
Euro
Previous comments on Euro continues to hold.
Gold
Gold made new highs for the session and has yet to reach our advertised level of 1800. This could happen but it is not a must. Any move below 1670 should confirm the upside pressure is over.
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.
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