Key analysis! Putting the pieces of the puzzle together
Over the last few weeks I made a few analysis and in this one I will put all the pieces together. I just had my 'aha' moment where I've finally been able to get a very clear picture in my head. Could I be wrong? Of course, but now both Technical analysis and Fundamental analysis is starting to come together. I want this to be my masterpiece and from now on to put simple trades out there and no more analysis. Will try to be brief on my points and then make a holistic analysis. (most of the charts will go at the bottom to keep the analysis clean and easy to follow)
Stocks: So far we have seen a major rally in indices. The catalysts where: Central bank QE - Central bank narrative - Buy the lockdown - Buy the dip mentality (retail buying) - Late shorts getting squeezed - Technical bounce - Focus on large companies that will do well in times of corona (Amazon, Microsoft, Netflix, Pharmaceuticals etc). Now stocks topped right in the middle of my top zone, right on the 300 DMA, Yearly Fibonnaci Pivot, Weekly R3 Fib Pivot and retested some old support that turned into resistance.
Nasdaq 100 has had a stronger bounce as tech and the top stocks have done much better. Most indices and small stocks broke below their 200 WMA, but Nas100 bottomed right on it. Compared to others, this index didn't even really break down. Other indices like the Russell 2000 or DAX etc have performed terribly and I expect this to continue. I expect this trend to continue, but this doesn't mean stocks won't go down as this trend doesn't care whether stocks go up or down. In 2019-2020 the Russell stayed below its mid 2018 ATH and the DAX was barely able to break it, make an SFP and then retest its 2000 and 2008 ATHs were it bounced hard. In Gold terms no index has been able to make new highs since 2018.
The problems in all economies are massive and there is no way to fix them just by printing money. No only printing money doesn't fix them, but it makes them worse. Look at the Japanese or European stocks for example... More debt is deflationary and will keep on making things worse. Most major countries are about to have Debt/GDP much higher than 100% and this isn't really sustainable. The economies weren't stable before and we saw the cracks in 2019 really showing up. Otherwise why did the Fed start cutting rates in late 2019 and doing QE (which they didn't want to call QE). Despite the fact that they were cutting rates and did QE the market still fell and no matter what they were announcing, the markets kept falling. Once they went 'all in' they stabilized and went up, but for how long? Liquidity doesn't solve... a solvency crisis. How many companies will they bail out? What happens if these companies fail anyways? What happens when the bonds they are buying go to 0? We are having to deal with a 20+ year debt orgy and a massive restructuring of the whole economy.
Both real and nominal yields are about to go negative (if they aren't already) in all major economies and all that while Central banks are going into QE unlimited. These will make the issues much worse later on even though they will ease the pressures short term. People can't take much more debt and as more and more people default (more QE doesn't mean no defaults) I can't see how stocks won't take a hit. In my view the next 2-3 years with potentially 50% small/medium size businesses/companies/corporations defaulting. In the next 10 years the monetary system as we know it will be totally different and the pain is going to be massive, as many currencies get absolutely destroyed. There will have to be debt jubilees because the path we are on is clearly unsustainable. QE + NIRP benefit financial assets and not the economy, but they still make them fragile. If i had to choose between holding cash or stocks over the next 10 years, I'd prefer to hold stocks because they'd have 99% go up in nominal terms (outperform cash) but not in real terms (I'd still be losing purchasing power).
People need to remember that this isn't 1929. We don't have a pegged currency... but now we are dealing with a more fragile economy and a massive external shock (the virus). Central banks are much more ready to act and willing to do whatever it takes, something that creates fake confidence. Point is that we could truly see new ATHs despite how bad the situation is. Maybe we have a dip to the 200 WMA and then new highs (at least in the US, not so confident in the rest of the world). This situation would normally lead to heavy outflows from the US, but the strength of the USD allows the US to print a lot more which will in turn benefit its stocks a lot more. This might reverse the net outflows into net inflows as people are seeking for a safe heaven. If the USD isn't going down despite all the QE and US stocks are outperforming the rest of the world, why not get into the US?
Having said all that I believe we will see a at least a 50% drop from ATHs on the SPX500 & NAS100 before we make new ATHs in nominal (NOT REAL) terms. For technical reasons 50% is perfect. Now let me explain why I see this coming and what I expect afterwards:
Warren Buffet hasn't bought anything, while major banks are recommending people to buy stocks.
We saw a sell the lock down rumour - buy the lock down and next coming is sell the reopening (which is getting closer).
People will realize central banks don't have the situation under control and expectations that the economy will be booming again won't come true.
Really heavy retail buying all the way down and all the way up.
The collapse of oil will have a massive impact both on the stock and debt markets as the shale industry is probably dead and I think we will see negative prices at least twice next until the EOY.
We've had a perfect retest and trap on the way up. the SPX could go up to 3030 before really rolling over, but for now it is hanging on a thread based on my analysis (last support at 2815-2820).
In 2001 & 2008 we got 50% corrections, but in 2008 even though the problems were smaller than now Central banks reacted very late. Now they have reacted very early on, calmed the markets... but when the markets realize the depth of problems, it will have another violent correction to retest the old ATHs both on the SPX and NAS.
Another final note is that I believe they want to step in and buy stocks. Regardless of whether they have the situation under control (I believe they don't, the market does) they would like to buy stocks, so they could let it drop again.
Now let's get into commodities, currencies and bonds:
Oil could have some upside here, but for reasons I've explained before, I can't see it go above 40 any time soon. In my opinion as storage is getting full, nobody is really travelling or consuming anything, plus many countries rely on oil for their finances... we are going to see massive shocks and oil going negative again. There are also issues with the USO ETF, were many people have though they are buying spot oil, when in reality they are buying some random contracts. SA could push oil to 0 again and destroy its competition and after that we could get some wars in the middle east. Unfortunately so many countries rely on oil exports that these low prices are seriously destroying entire systems.
Platinum, Palladium, Copper all look awful. Silver and Gold are holding pretty well, but I think Gold could hit 1360 and silver isn't going to outperform gold any time soon as big chuck of its production is for industrial use. Also most speculators are long Silver and not Gold, which makes them even more susceptible to huge downside. Gold will benefit a lot from the uncertainty, low rates and QE, but if the USD spikes again we could see it drop again before it breaks to new ATHs vs the USD. Gold has been making new ATHs against most other currencies except the USD, so until we see at least a close above 1740 which as I have mentioned is a key pivot (yearly R3), I am cautious with it. Gold/Silver ratio is still on an uptrend, which definitely shows that industrial metals aren't all that attractive yet and might now be for some time.
Bonds look ready for more upside. Normally with QE bonds go down, but with extreme deflationary pressures it is really hard for them to go down. Maybe we see a break down in bonds, but for now to me it looks like they are getting ready for the next leg up. Wouldn't be surprised to see them go up as stocks go down and people need to put their money somewhere 'safe', especially as they know central banks will be buying them later on. As US bonds have some juice left compared to others, maybe we see the USD go down against the EUR and JPY before it goes up again. Eventually bonds will lose their value as rates skyrocket, but I don't see this happening yet.
Last week the USD went up against down against most currencies and the DXY broke down, but it closed the week pretty strong vs most currencies except the EUR. This could go hand in hand with what I said above. Overall all Central banks will do QE and most of that money will go into the US, but for now as US yields go down (as bonds go up) EURUSD could pop up a few percentage points. Once it loses 1.03 we can call the Euro dead. For now it still holding relatively well but in my opinion it mostly because of short term psychology & supply/demand rather than real fundamentals. Many currencies might see 2-6% gains vs the USD, but I don't think they will last long. I do not see how the Euro will survive in the next few years and I definitely can't see EM currencies doing well once economies reopen and face the harsh reality that they don't have enough USDs. Most of these central banks cut rates and might have to do so again while their currencies are falling hard which exacerbates the problem. The US is stuck near the 0 bound and going negative might take some time, while these ones have some extra room. All 3 have very serious currency issues (low FX reserves, debt, rely on exports, tourism etc). Also the Fed's balance sheet is a much smaller vs the US' GDP (~30% when Japan, Australia and Europe are >50%) which give much more room to the US to print money, most of which won't really be able to ease the US dollar shortage.
To start wrapping this up and give some potential plays:
I don't like the Gold triple/quadruple bottom. These things don't hold and for now Gold is overbought (short term - long term I see 5k Gold in the next 2-5 years)
Platinum, Palladium, Copper are all great for shorting. Gold/Silver ratio is also great for longs.
Oil just broke out from some weird Adam & Eve bottoms, so we could see it pop higher to about 25$/barrel before going much lower again.
If the SPX closes below 2815 stocks are for shorting again. We have seen the trend reverse at the best possible place and this is the last line of support imho.
A push to 3030 on the SPX is possible and a close above it would signal ATHs are coming.
Banks, Airlines and anything that gets heavily affected by the virus is still for shorting. Many companies will go to 0 eventually, especially those with lots of debt.
US10Y yields are going negative which means USB10YUSD could hit 150-160, while TLT goes above 200.
The DXY could get to 97 before going higher. 94 is the lowest I believe it could potentially go before reversing to the upside.
USDTRY could hit 10+ once it closes above its ATH. USDZAR is above its previous ATH and looks ready to continue and same goes for USDMXN, both of which are up more than 30% in the last 2-4 months, but could easily gain another 20%. The doom loop is real as the lower the currency goes, the bigger the problem, the lower it has to go.
The VIX looks like it has completed its retest from its break out and is ready to move up again. I can't believe it won't break its 2008 high this time around where the problems are much larger, more global and there is no room for growth. China can't save us, rates can't go much lower without destroying banks and we aren't dealing with a few bad banks or countries. Everyone has a problem and the virus is making everything much worse.
tradingview.com/x/beLG9OAj/
Stocks: So far we have seen a major rally in indices. The catalysts where: Central bank QE - Central bank narrative - Buy the lockdown - Buy the dip mentality (retail buying) - Late shorts getting squeezed - Technical bounce - Focus on large companies that will do well in times of corona (Amazon, Microsoft, Netflix, Pharmaceuticals etc). Now stocks topped right in the middle of my top zone, right on the 300 DMA, Yearly Fibonnaci Pivot, Weekly R3 Fib Pivot and retested some old support that turned into resistance.
Nasdaq 100 has had a stronger bounce as tech and the top stocks have done much better. Most indices and small stocks broke below their 200 WMA, but Nas100 bottomed right on it. Compared to others, this index didn't even really break down. Other indices like the Russell 2000 or DAX etc have performed terribly and I expect this to continue. I expect this trend to continue, but this doesn't mean stocks won't go down as this trend doesn't care whether stocks go up or down. In 2019-2020 the Russell stayed below its mid 2018 ATH and the DAX was barely able to break it, make an SFP and then retest its 2000 and 2008 ATHs were it bounced hard. In Gold terms no index has been able to make new highs since 2018.
The problems in all economies are massive and there is no way to fix them just by printing money. No only printing money doesn't fix them, but it makes them worse. Look at the Japanese or European stocks for example... More debt is deflationary and will keep on making things worse. Most major countries are about to have Debt/GDP much higher than 100% and this isn't really sustainable. The economies weren't stable before and we saw the cracks in 2019 really showing up. Otherwise why did the Fed start cutting rates in late 2019 and doing QE (which they didn't want to call QE). Despite the fact that they were cutting rates and did QE the market still fell and no matter what they were announcing, the markets kept falling. Once they went 'all in' they stabilized and went up, but for how long? Liquidity doesn't solve... a solvency crisis. How many companies will they bail out? What happens if these companies fail anyways? What happens when the bonds they are buying go to 0? We are having to deal with a 20+ year debt orgy and a massive restructuring of the whole economy.
Both real and nominal yields are about to go negative (if they aren't already) in all major economies and all that while Central banks are going into QE unlimited. These will make the issues much worse later on even though they will ease the pressures short term. People can't take much more debt and as more and more people default (more QE doesn't mean no defaults) I can't see how stocks won't take a hit. In my view the next 2-3 years with potentially 50% small/medium size businesses/companies/corporations defaulting. In the next 10 years the monetary system as we know it will be totally different and the pain is going to be massive, as many currencies get absolutely destroyed. There will have to be debt jubilees because the path we are on is clearly unsustainable. QE + NIRP benefit financial assets and not the economy, but they still make them fragile. If i had to choose between holding cash or stocks over the next 10 years, I'd prefer to hold stocks because they'd have 99% go up in nominal terms (outperform cash) but not in real terms (I'd still be losing purchasing power).
People need to remember that this isn't 1929. We don't have a pegged currency... but now we are dealing with a more fragile economy and a massive external shock (the virus). Central banks are much more ready to act and willing to do whatever it takes, something that creates fake confidence. Point is that we could truly see new ATHs despite how bad the situation is. Maybe we have a dip to the 200 WMA and then new highs (at least in the US, not so confident in the rest of the world). This situation would normally lead to heavy outflows from the US, but the strength of the USD allows the US to print a lot more which will in turn benefit its stocks a lot more. This might reverse the net outflows into net inflows as people are seeking for a safe heaven. If the USD isn't going down despite all the QE and US stocks are outperforming the rest of the world, why not get into the US?
Having said all that I believe we will see a at least a 50% drop from ATHs on the SPX500 & NAS100 before we make new ATHs in nominal (NOT REAL) terms. For technical reasons 50% is perfect. Now let me explain why I see this coming and what I expect afterwards:
Warren Buffet hasn't bought anything, while major banks are recommending people to buy stocks.
We saw a sell the lock down rumour - buy the lock down and next coming is sell the reopening (which is getting closer).
People will realize central banks don't have the situation under control and expectations that the economy will be booming again won't come true.
Really heavy retail buying all the way down and all the way up.
The collapse of oil will have a massive impact both on the stock and debt markets as the shale industry is probably dead and I think we will see negative prices at least twice next until the EOY.
We've had a perfect retest and trap on the way up. the SPX could go up to 3030 before really rolling over, but for now it is hanging on a thread based on my analysis (last support at 2815-2820).
In 2001 & 2008 we got 50% corrections, but in 2008 even though the problems were smaller than now Central banks reacted very late. Now they have reacted very early on, calmed the markets... but when the markets realize the depth of problems, it will have another violent correction to retest the old ATHs both on the SPX and NAS.
Another final note is that I believe they want to step in and buy stocks. Regardless of whether they have the situation under control (I believe they don't, the market does) they would like to buy stocks, so they could let it drop again.
Now let's get into commodities, currencies and bonds:
Oil could have some upside here, but for reasons I've explained before, I can't see it go above 40 any time soon. In my opinion as storage is getting full, nobody is really travelling or consuming anything, plus many countries rely on oil for their finances... we are going to see massive shocks and oil going negative again. There are also issues with the USO ETF, were many people have though they are buying spot oil, when in reality they are buying some random contracts. SA could push oil to 0 again and destroy its competition and after that we could get some wars in the middle east. Unfortunately so many countries rely on oil exports that these low prices are seriously destroying entire systems.
Platinum, Palladium, Copper all look awful. Silver and Gold are holding pretty well, but I think Gold could hit 1360 and silver isn't going to outperform gold any time soon as big chuck of its production is for industrial use. Also most speculators are long Silver and not Gold, which makes them even more susceptible to huge downside. Gold will benefit a lot from the uncertainty, low rates and QE, but if the USD spikes again we could see it drop again before it breaks to new ATHs vs the USD. Gold has been making new ATHs against most other currencies except the USD, so until we see at least a close above 1740 which as I have mentioned is a key pivot (yearly R3), I am cautious with it. Gold/Silver ratio is still on an uptrend, which definitely shows that industrial metals aren't all that attractive yet and might now be for some time.
Bonds look ready for more upside. Normally with QE bonds go down, but with extreme deflationary pressures it is really hard for them to go down. Maybe we see a break down in bonds, but for now to me it looks like they are getting ready for the next leg up. Wouldn't be surprised to see them go up as stocks go down and people need to put their money somewhere 'safe', especially as they know central banks will be buying them later on. As US bonds have some juice left compared to others, maybe we see the USD go down against the EUR and JPY before it goes up again. Eventually bonds will lose their value as rates skyrocket, but I don't see this happening yet.
Last week the USD went up against down against most currencies and the DXY broke down, but it closed the week pretty strong vs most currencies except the EUR. This could go hand in hand with what I said above. Overall all Central banks will do QE and most of that money will go into the US, but for now as US yields go down (as bonds go up) EURUSD could pop up a few percentage points. Once it loses 1.03 we can call the Euro dead. For now it still holding relatively well but in my opinion it mostly because of short term psychology & supply/demand rather than real fundamentals. Many currencies might see 2-6% gains vs the USD, but I don't think they will last long. I do not see how the Euro will survive in the next few years and I definitely can't see EM currencies doing well once economies reopen and face the harsh reality that they don't have enough USDs. Most of these central banks cut rates and might have to do so again while their currencies are falling hard which exacerbates the problem. The US is stuck near the 0 bound and going negative might take some time, while these ones have some extra room. All 3 have very serious currency issues (low FX reserves, debt, rely on exports, tourism etc). Also the Fed's balance sheet is a much smaller vs the US' GDP (~30% when Japan, Australia and Europe are >50%) which give much more room to the US to print money, most of which won't really be able to ease the US dollar shortage.
To start wrapping this up and give some potential plays:
I don't like the Gold triple/quadruple bottom. These things don't hold and for now Gold is overbought (short term - long term I see 5k Gold in the next 2-5 years)
Platinum, Palladium, Copper are all great for shorting. Gold/Silver ratio is also great for longs.
Oil just broke out from some weird Adam & Eve bottoms, so we could see it pop higher to about 25$/barrel before going much lower again.
If the SPX closes below 2815 stocks are for shorting again. We have seen the trend reverse at the best possible place and this is the last line of support imho.
A push to 3030 on the SPX is possible and a close above it would signal ATHs are coming.
Banks, Airlines and anything that gets heavily affected by the virus is still for shorting. Many companies will go to 0 eventually, especially those with lots of debt.
US10Y yields are going negative which means USB10YUSD could hit 150-160, while TLT goes above 200.
The DXY could get to 97 before going higher. 94 is the lowest I believe it could potentially go before reversing to the upside.
USDTRY could hit 10+ once it closes above its ATH. USDZAR is above its previous ATH and looks ready to continue and same goes for USDMXN, both of which are up more than 30% in the last 2-4 months, but could easily gain another 20%. The doom loop is real as the lower the currency goes, the bigger the problem, the lower it has to go.
The VIX looks like it has completed its retest from its break out and is ready to move up again. I can't believe it won't break its 2008 high this time around where the problems are much larger, more global and there is no room for growth. China can't save us, rates can't go much lower without destroying banks and we aren't dealing with a few bad banks or countries. Everyone has a problem and the virus is making everything much worse.
