Liquidity, Euphoria and Airpockets

Summary

Liquidity is a double edged sword as it helps manage financial obligations while artificially inflating prices.  Combine excess liquidity with euphoric investor sentiment and risk asset valuations stretch even as economic fundamentals deteriorate.  On the way up, it feels great as higher prices increases wealth. BUT, the air pockets they create cause major damage.  The air pockets lead to strong, swift and unexpected corrections leaving many investors in panic and get whipsawed.
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Rabbie Gill

About the Author

Main Article

The global economy and risk markets are now facing a new pandemic of the novel coronavirus.  This negative externality at a time several cross currents of cycle highs and lows will make 2020 a very trying year for investors.  The impact, duration and intensity of the outbreak will have far reaching effects on the global supply chain for years and decades.  If there is any truth to the rumors that the novel coronavirus is an artificially created bioweapon that “escaped” the lab… multinational corporations will have to really assess these risks of the locales they choose to operate in. The risk / reward equation focused mostly on lowest cost will change materially.

On to the markets.

The S&P 500 moved to new cycle highs by mid-Jan 2020 as it is ripe for a daily, weekly & monthly cycle high.  The last week of Jan 2020 saw the S&P500 trigger daily & weekly cycle bearish cycle & trend changes.  Typically, the monthly cycle top results in a 5 to 13% correction, which TRI is anticipating.

Source: Tradingview.com

The tricky part is when will central banks and governments step in with further liquidity and support to manage the depth and duration of the correction.   Support levels are 3,150 to 3,190 and from there 2,880, 2720 and then 2,350.

TRI expects a retest of the 2,400 region, with two potential paths. The first is, a correction to the 3,150 to 3,190 level where central banks “support” the market and S&P500 rallies to 3,800 to 4,000 region before correcting to 2,400 region.

The second is a flush down to the 2,400 to 2,600 region from current levels as the risk appetite disappears of the next several months. From there the market rallies to the 3,800 to 4,000 region. TRI will assess market developments and adjust exposures as opportunities develop.

In any event, the US equity markets are the cleanest dirty shirt.  They will likely outperform emerging markets for the foreseeable future.

Euphoric sentiment…

Investor sentiment measured by the CNN Fear & Greed Indicator hit all time highs in early Jan 2020.  Over the past few weeks, greed sentiment has moderated but prices have not corrected commensurately. Any fall to extreme fear levels will likely coincide with central bank / government interventions.

Source: cnn.com

 Falling rates…

Interest rates, whether short or long-term continue to fall. The retrace of rates higher into late 2019 likely marked the weekly and monthly cycle highs. Expectations are for lower interest rates for the short and medium term.

Source: Tradingview.com

 Emerging Markets still look sick…

The EEM ETF was down sharply last week.  The bear flag set up is still alive and a great example of how the fall 2019 liquidity infusions extended the corrective move up.  However, the air pocket it created led to a quick 5% move to the downside and has done nothing to change fundamental realities.

Source: Tradingview.com

Global trade is collapsing…

 And this was before the novel coronavirus travel restrictions where put into place. The trend for 2020 isn’t promising.

Source: Financial Times

 IMF cuts global growth

IMF has cut its growth expectations, which TRI believes is still optimistic.  Risk are to the downside

Source: Tradingview.com

 And Dr. Copper…

Has retraced its Fall 2019 bounce, in less than 2 weeks. Liquidity plus euphoria creates painful airpockets.  How long before we to touch the low $2.00?

Source: Tradingview.com

Stay liquid, stay defensive and follow your investment plan.

TRI Cycle & Trend Signals*

The TRI Cycle and Trend Signals are shown below.  These signals are as of market close on Jan 31, 2020.  Please see the TRI Overview document for further information.

Source: Fieldhouse Capital Management

* TRI Cycle and Trend Signals are dynamic and may change on a daily, weekly and monthly basis, without notice. The indicators are at a point in time and do not imply that the current trend will persist and should not be considered investment advice.

Disclaimer: This material has been provided solely for information purposes for the use of the recipient and Fieldhouse Capital Management Inc. (FCMI). This material does not constitute an offer or an invitation by or on behalf of FCMI to any person to buy or sell any security. It should not be assumed that the methods, techniques, or indicators presented in these pages will be profitable or that they will not result in losses.  Any reference to past performance is not necessarily a guide to the future and the value of investments may fall as well as rise.  FCMI accepts no liability for any direct or consequential loss arising from investments made in accordance with the attached material. The research and analysis contained in the attached material has been procured from sources which are believed to be reliable and accurate.

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