Markets are underpricing risk

Abraham George Macro View

In my past reports we have been alluding that everything with the election is not fully done. There could be more chaos surrounding the election and the market is underpricing that risk. The timeline is narrowing for resolving all election disputes and the deadline for that is Dec 8th. While the majority of the media is not interested in covering the Trump legal team’s arguments, they are becoming more vocal and will find a way to take their case to the American people.

The Trump legal team’s premise is that there has been a broad base domestic and foreign conspiracy to fix the election. Of course the validity of all these allegations will be finally decided by the court but before that the Trump team will continue to take this to the American people. And if the evidence grows, the mainstream media will find it very hard to ignore it or discredit it.

But, as for us as marketeers, I think many are in a very complacent mood. The evidence is very much in the trading of the VIX. It is at the lowest post-Pandemic levels.

Equities

Markets were fairly quiet for most part of the day on Friday but in the almost closing minutes markets got sold off. All the three major indexes closed lower than the day before. The intensity of the selling was muted as the breadth was only modestly negative and so was NYSE up/down volume ratio.

In the last two weeks small cap indexes and secondary stock indexes have had the largest rally. Historically seasonal factors have supported this behavior into at least Dec if not the new year.

The low in the S&P 500 occurred at 3542 last week. The rally since then has been a three wave upward correction so the chances are market will see more weakness this week. The next significant support is around 3515 but think there is more downside to it.

Bonds

Bonds have exceeded our initial expectations of resistance. Our confidence currently is dented, so we are looking for more price action. However, a break below 171^10 will get us excited again but it is a bit far off from current levels.

Euro

After testing 1.1894 prices have started to stall. Prices may come down below 1.1800 and even find support at 1.1745. So, price gyrations can continue before it resumes its move higher.

Gold

On Thursday gold found support at 1853. We believe prices can still challenge 1835 and further move down to 1760.

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.