As you know, over the past few weeks we have been warning investors that we would experience a last rally in April before a sharp correction unfolded in May and June 2021.
Global Equities are topping out
We had stated an ultimate target of 4’150 on the SP500 which has been reached in the past couple of days and have been advising our readers to take profits on strength and move to the safey of cash and Treasury Bonds.
The US SP500 has reached the time window and the target of our April top projection, and we expect a reversal to take place in the next few days as part of a top building process before starting its first significant down leg into early May.
As we always highlighted, when moving into the end phase of major tactical bull cycle or bull markets, It is a myth to think that bull markets end in pure euphoria!!
What we see ahead of major tops are significant divergencies in sentiment indicators, and failed confirmation in the price indicators of key sectors and markets.
Last week’s bounce – a new high – has been primarily driven by short covering in the US Technology sector while Cycliclas and defensives were losing momentum.
Global sentiment indicators are now forming a major divergence versus the recent SP 500 high, which suggests that a major top is at hand. Moreover, the development of a significant divergence forming between the Russell-2000 and the S&P100, is a high conviction leading indicator for major tops in equities.
Both the SP500 and the Russell 2000 are peaking with record overbought weekly momentum, and the Russell 2000 is probably the most at risk in. terms of the magnitude of the correction n, explaining why we have increased our shorts there.
Last week, we also highlighted the extremely bullish consensus with retail investors, which is a contrarian sell signal.
With the BIDEN US infrastructure announcement, it will be difficult to see a better news flow about stimulus and dovish central banks from here into summer and analysts revisions coming into the reporting season are atbthe highest seen in decades, meaning that analysts and the market expect extremely good news.
With record inflows into equities and contrarian bullish investor sentiment, global equities are moving into our expected “peak policy” event as the trigger for a significant correction in Q2 2021, providing the basis for another leg up in the second half of the year, for a major secular top in the firs half of 2022.
Bonds to outperform
As our readers know, we have been calling an intermediate top in bond yields and have accumulated US Treasury Bonds. Global yields are in a tactical topping process for pullback into June 2021, and we expect US 10- year yields to reach 1.30% to eventually 1.14% before starting the final upward wave that will trigger the Bear market in 2022 with a final target of 2.14% or even 2.57% into Q1 2022.
Emerging Markets are at risk
Emerging markets have already peaked and Chinese domestic equities remain heavy, even if most of the correction there has already taken place. We have bailed out of emerging markets in the past few weeks and will only re-enter in June 2021, when the global correction. will have unfolded.
Gold and Commodities
Precious metals have been correcting for the past three months and have now formed a base that will see them rally in the coming two months together with Silver and and other precious metals.
Conversely, we expect Copper and Oil to correct significantly in the next two months.
This is a time to reduce risks in global equities and Technology stocks. No market will be spared save eventually for the Hong-Kong listed Chinese equities.
Bonds and Gold are positive for the coming two months, and speculative and frothy assets should be avoided at all costs.
BUY CBOE VOLATILITY INDEX
VXX US @ 10.16
In line with our scenario for the coming two months, the best way to play then coming correction is to BUY volatility through the CBOE Volatility Index ETF VXX US.
Volatility has been falling consistently over the past few months, in line with rising and extreme bullishness and reduced hedging.
The VXX US is a US trade ETF that tracks the CBOE volatility Index
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