Fed chief warns of painful damage

Fed Chairman Jerome Powell was very cautionary and grim in his speech for the Peterson Institute for International Economics through a webcast. He said the pandemic could “leave behind lasting damage” to US economic productivity. He feared the recovery will take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems.

Wall Street could not stomach the Fed Chairman’s painful outlook and the market quickly turned south with the Dow dropping more than 500 points.

Meanwhile, companies are already thinking of making the WFH (work from home) style permanent. Twitter is trying to be ahead of the curve on this and their CEO Jack Dorsey announced yesterday employees will be allowed to work from home permanently.

Going forward, this should set a chain of new working conventions, compensation tiers and business models. It will be interesting to see how the job markets will evolve. One thing for sure, business suit prices are not going up. Spiderman and Rhino printed pajamas should be in style.

While the US Fed and Treasury are proactive in dealing with the situation, the UK authorities are out of their depth. They fear GDP could fall by 30% in second quarter. They are faced with the biggest financial and health crisis in its modern history. Let’s turn to markets.

Equities

We believe the corrective wave in a bear market is the most gut wrenching and psychologically damaging part of the time for a trader or investor to be in the markets. The purpose of the corrective move is to convince you that nothing has changed, and we are still going higher. Nothing can be further from the truth. This period separates the boys from the men.

If you don’t understand or believe in the vagaries of the wave principle but follow classical charting, have a look at the hourly chart of the Dow or the S&P 500. There is a clear S-H-S (shoulder-head-shoulder) topping pattern. With yesterday’s fall, I think the pattern is complete and it has broken below the neckline.

Yesterday’s sell off was broad based. Declining stocks outnumbered advancing stocks by 8 to 1 on the NYSE. Downside volume was terribly negative with almost touching 90%. Think yesterday’s move could be the cursor for something bigger.

We highlighted many times that the mid 2900 handle is a topping point for the S&P 500. In its repeated attempts in that area, the markets filled most of its gaps. Gaps are to be filled at some point. We think the coming down move can extend to 2490 before we can gain more clarity on future moves.

Bonds

Bonds continues to curl and coil within its defined ranges. As mentioned in the last report, the breakout point is 178. We came remarkably close to that and bounced off.

Euro

No change in the Euro analysis from the previous report.

Gold

Gold has been the perfect traders’ market for some time. I am sounding more like a broken record. The top may have been formed at 1748 and a move below 1660 should eliminate any further upward pressure. However, there is a risk for it break higher before it turns down again.

Be safe. Be small. Be home.

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.