Which market will top out first?
Abraham George Macro View
Democrats have flipped the Senate in their favor but there is big drama going on at Capitol Hill and some people are getting physically hurt. Stocks rallied strongly yesterday due to expectations of a Democrat sweep. This means a big government spending is coming down the pike. With all the money that exists in the system and adding more trillions means your cash is getting trashed.
Cash is quick to find safety in asset prices and hence the rise in stocks. Market is also fearing hot inflation and the Fed is now caught between a rock and a hard place. The Fed has no choice but be caught behind the curve. The Fed continues to buy treasuries but the yield on the 10 year has traded as high as 1.05 % yesterday. The highest since Mar 20th 2020.
If you are a global investor there is more reason to be out of US treasuries now which was deemed as the most safest and liquid of all instruments. Just like the Spanish Inquisition, until a few weeks back nobody on Wall Street was expecting the Democrats to win. The victory has helped two sectors in particular to rise sharply. Alternative energy and cannabis.
With pot-happy Democrats in control of both the White House and Congress, decriminalization and potential legalization are now closer than ever. The legislative sun is also about to shine brighter than ever on alternative energy. If you aren’t already prepared for this generational and seismic shift in the energy market, it is better to start now.
Equities
Are we seeing a similar situation to Jan 2020? Last year, it began with a rally in most financial assets. First, the FX markets topped out with Euro making a high on Jan 02, 2020. The same day the US treasury long bonds made a high too. The CRB index topped on Jan 03, 2020. Gold made a high on Feb 24 and a slightly higher high on Mar 9. The Dow’s high occurred on Feb 12 and the S&P 500 on Feb 17. Bitcoin made a high on Feb 13. Interesting point was that each high was spread out over a few weeks but all markets declined more or less in unison in Mar 2020. The question now - which market will top out first?
The Dow rallied 1.44% yesterday while the NASDAQ declined 0.61 % . Usually it has been the other way around. The NYSE advance/decline ratio closed at 1.76:1. Not a big reading. The McClellan Oscillator managed to close above zero for the first time in 12 days. So the rally could extend. However a move below 30,300 in the Dow and 3,700 in the S&P 500 would diminish the potential.
Bonds
The yields on the treasury long bond index pushed to 1.69% an almost 10 month high. We have been harping on this down move in bonds for a long time and our initial major targets are around 155. A snap back rally can take prices to a maximum of 171^25 which should provide a good selling opportunity.
Euro
The Euro could be in the final stages of a rally that started on 23 Mar last year from 1.0635. The significant wave relationship resistance comes in at 1.2435 to 1.2455. It can even top out before that. A close below 1.2210 should increase the odds that a top may be in place.
Gold
Gold pushed itself higher to 1959 taking it close to its resistance at 1965. The sharp intraday reversal knocked it down to 1901. Prices can continue to break lower but a close above 2007 will argue that gold can rally to it previous Aug 2020 highs.
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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