Macro micro trader

Business and economic cycles – one of the highly known theory yet widely ignored in the modern highly liquid times, is something on which I base my macro views on. (Graph posted below is self explanatory)

Before I delve deeper into my theory and my own explanation of what my view on the market is, let me clarify – I’m no economist, nor am I a certified analyst and it is highly recommended to consult your financial advisor before basing any financial decision on the basis of what is being written here.

Lets dive in. Why is the above cycle so important and why am I talking about it? Markets precede what happens in the economy by six to nine months. The crash and bounce of 2020 is one such example. The inversion of the yield curve took shape much before the economic contraction took place due to Covid-19 in 2020. Markets crashed and bounced faster than the economy could. Entire one economic cycle of crash and boom has been so steep and faster that, normally which takes about 7-10 years, it happened within a period of 2 years.

All this happened so fast that the market cycle of bottom, bull and top took place even before one could recover from the shock of what Covid did.

What next?
What happened in 2020 and 2021 with some stocks and asset classes is a clear sign of euphoria that leads to crash in the markets. Nothing mattered in terms of valuations all this while. You pick any stock and you couldn’t lose money. While, stock markets have never been a place where anybody, with no income, no revenue could command tens of billions of dollars worth of market capitalization. Yet we had many such names. I have had this view for past few months that we are in the euphoric phase of the market and what would follow would be far worse then what any of the investors/traders of last decade may have seen.

Some equate current phase of markets to dot com, while others say its far worse. Whether its worse or better would only be known in a few years when we would be past the upcoming crash. How much crash? I really don’t know. But, I know for sure, it won’t be less than 20 percent, could easily be 30-50 percent and may even go beyond that.

Now, that’s not to scare you all, but to prepare you for what lies ahead. Those who have been tracking me and the views I share, by now they already would be prepared because I have been hand-holding them for quite some time now.

Some technical views now:
Starting with a chart on $RTY – Rut Index futures:

What’s visible above is a clear chart of trend reversal on the e-mini futures of Russell 2000 index. The trend which was up for quite some time, has decisively turned lower. Its fascinating though, how it broke out of that upper trendline in the month of November but failed to hold on to the breakout – false breakout as very well known in the technical analysis parlance. As if the false breakout was not enough, it broke down of the 20, 50 and 200 days SMAs too, to fall all the way towards lower end of the very channel (some call that as a triangle, no matter what, it was a months’ long consolidation, breakout of which needed sustenance). It did show a bounce off the channel support early December, only to fall back again and below the lows hit earlier.

It all sums up to one conclusion – the trend has turned lower for good for all those small and mid cap stocks.

Next up (or should I say down?) – The Dow:

Similar to $RTY, yet different. Of course Dow did not consolidate as $RTY did, but it couldn’t make a new high after bouncing off the lows earlier this month. Thats one sign of a lower high. Another sign of trend reversal taking shape – falling off the 20 and 50 daily SMAs and all the way towards supports that were already broken in its recent sell-off and unlikely to hold again. What comes next is 200 days SMA around 34,000 and then critical support from the trendline of June this year. Its critical for the Dow to hold onto this trendline for any bullish momentum to resume. But, I won’t bet on it as of now as the market cycle has already started turning from euphoric to doomsday. Santa rally? Perhaps not this year.

In order to not make this article too big to read, next up would be my view on some major commodities and how they’re signalling the trend reversal already. Till then, happy holidays and stay in cash.

Important note: I’m not a SEC registered analyst or an advisor. Consult your financial advisor before taking any financial decision after reading this article.