Big opportunities and changes happen in markets
When? When we collectively face cognitive dissonance. We are at such a point in history now. We faced similar situations in 1994 and in 2018. In most situations, the Fed is the cause of it. They first send wrong signals on interest rate policies and are forced to make an about-face turn. In July 1995 the Fed was busy cutting rates. So was it in early 2019 to date? In both these situations, stocks went sharply higher. In 1995, it was north of 36 % and in 2019 it finished at around 32 %. Coming into 2020 unemployment was at record low levels, wages were at 11-year highs, household net worth was at record levels and the consumer was in a strong position.
Despite having the best of conditions in a long time, we had the deepest economic contraction in history for reasons known to all of us. But now on one side, things are looking rosy again. There is visibility toward a fully reopened economy again. Probably a massively stimulative fiscal and monetary policy is waiting in the wings. Household net worth has already recovered to new record highs again. Looks like a formula for a big 2021 is in the pipeline. On the other side news out of the UK on the variants of COVID-19 are disturbing. Brexit’s issues are also confusing the European landscape.
2020 was supposed to be a big year for 5G but think it should roll out fully in 2021. The CEO of Qualcomm said it will have a similar impact on the introduction of electricity. Meaning it will dwarf the lifestyle changes we have seen in the first two phases of the internet. So the next two years are expected to be transformative for the global economy. Remember in the previous decades we overcame the Asian crisis, Russian default, and the blow-up of LTCM.
We will overcome this too but be ready for unexpected volatility.
Equities
It was a roller coaster ride in the major markets yesterday. The S&P 500 made a new high at 3724 and dropped 128 points to trade at 3596. In New York time the market recovered most of its losses.
Opportunities and possibilities exist on both sides of the markets. The watershed level for the S&P to hold is 3636 the intraday low in the NY session yesterday. In the Dow 8 stocks closed higher while 22 closed lower. In the S&P 500 around 76 % of shares closed lower. So the internals was lower despite a positive Dow close. For the Dow yesterday’s high at 30,304 is critical. If that top holds we could be in for some very sharp moves to the downside. The way the markets bounced back yesterday chances is equally there for further upside potential. Therefore, to be nimble in these market conditions.
Bonds
Bonds have been trading sideways which should eventually resolve into a decline. With the holiday season, there could be more short-term gyrations that are not worth pursuing.
Euro
As we mentioned in the last report the 1.2250 area acted as a solid resistance. Markets fell down sharply to 1.2130 but have quickly recovered to the 1.2250 area again. Prices can carry above the previous high at 1.2273 and trade in the 1.2300 to 1.2325 area before we top out again. A move below yesterday’s low will completely change the outlook for much stronger further weakness.
Gold
The rally in gold from the low of 1765 exceeded our expected highs to trade to 1.907. The way Gold is reacting does not give the indication that it will be a safe haven, in the case of an equity bear market. The levels to watch on the downside is 1820 and on the upside are in the region of 1915-1930.
Author: ©Abraham George, CEO, Founder of AllSeasonsPTL Capital Management Ltd.
