The markets dropped sharply last week, with a strange occurrence - the VIX did not follow accordingly yet. Price action looks like capitulation, but the market seems to be to reluctant. Rydex Nova/Ursa jumped from .65 to .72 out of red alert territory and back down to .66. XBD closed below 150, which implies big trouble ahead still. NDX made a similar pattern as the SPX weeks before with a downside target of 1780/1800. We will likely start to develop intermarket divergence through July, while forming a temporary bottom. This is a strange decline and one of the old favorites and pathetic stories of decoupling markets is coming to an end quickly with China and India in crash mode. We are in a short US week and we might be in a strange situation since the new moon on Thursday might provide a short term bounce time frame for 1-2 weeks thereafter but a renewed bear-strike thereafter, since XBD needs to hit new lows as well targeting 135/40 and area NDX needs to test the 1780/00. A good indicator will be VIX. We need to go to 30 to mark a medium term low, so a daily close above 25 will be the first indication but very likely this week. Nevertheless, the next week will be a plus week and we might even see this Thursday some shortcovering since the DOW will have with 2 lower closes from Friday an exhaustion price level short term.
Overall, much more downside will come within 1-2 years valuations will go back to single digit PE's. Just to give you a feel of the magnitude, XBD will be at 100 - best case - but before we will see the expected 3rd Q. rally - a sucker rally and the Tech sector might even make a new high I fundamentally do not understand why but that's what the price action tells me so far and many houses like Goldman push that idea.
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