A lot of folks expected a stock market crash after Western countries imposed sanctions on Russia this weekend. They were wrong again. Equities did not crash despite having enough narratives to justify a waterfall selloff. Tensions morphed into a large-scale conflict of a nuclear superpower with NATO. The financial system has been weaponized as Western countries froze Russian reserves abroad and imposed sanctions. Subsequently, the Russian central bank hiked key rates to 20%. Nonetheless, the emergency and capital control measures could not stop the crisis. The Russian currency dropped by more than 30% and markets price a 50/50 chance of Russian default. Consequently, Russia’s economy probably entered a deep recession.
Similar financial events sent shockwaves through markets during the Russian crisis in 1998. Nonetheless, US equity indices closed Monday’s trading session slightly higher than before the invasion began. Adverse financial and geopolitical events could not take the market down. Therefore, pessimists might want to question at this junction what it takes to bring the market down after all. An essential part of the answer to that question is that fundamentals were different in 1998 than they are today.
(Source: Investors Intelligence, Yardeni LLC)
Macro indicators are constructive, and sustained bear markets only unfolded in recessions. Moreover, behavioral evidence is also positive from a contrarian perspective. The Investors Intelligence Bull-Bear ratio, for example, was just slightly above one on February 22nd. It would have probably dropped below one if the poll were taken on the day of the Russian invasion in Ukraine. Another sentiment indicator, the AAII poll data, confirms that individual investors are extremely pessimistic. Similarly pessimistic prints were recorded near the beginning of sustainable rallies, according to decades of statistical evidence.
Technical signals line up on the same side of the ledger. Momentum continued diverging from one low to the next low. Volume confirms this picture as the second chart shows. The SPY ETF’s volume diverged on a lower low last week. During the past few years, the same volume divergence was also evident at durable market bottoms and tops. Sellers could be done here as the vast majority expects significantly more downside.
The most likely Elliott wave path is as well on track for an all-time high during the next few weeks. A fourth wave of intermediate degree was probably unfolding as the S&P 500 corrected during recent weeks. The correction either ended last week or has a final leg of subminuette degree left to the downside. A fading three-wave correction during the next few days signals more upside. Bulls want to see a sustained break of the 4490 S/R to confirm a trend reversal. That signals that a local bottom might be in after going through oversold and excessively pessimistic conditions. Nonetheless, there is not enough evidence that equities already reversed. Another bearish swing on weaker momentum could still target 4065 before the next sustainable rally begins.
All in all, the conclusion does not change: The bull run is likely maturing but not over yet. US equities will probably rally and take the S&P 500 towards 5000-5200 during the next few weeks. Macroeconomic, behavioral, and technical evidence remains constructive.
The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors. Reproduction without ESI Analytics’ prior consent is strictly forbidden.
Follow us on Telegram
Stay updated of all the news
EUR/USD drops toward 1.0700 after US jobs report
EUR/USD came under renewed bearish pressure in the second half of the day on Friday and declined toward 1.0700. Stronger-than-expected Nonfarm Payrolls (NFP) data helps the US Dollar gather strength ahead of the weekend and forces the pair to stay on the back foot.
GBP/USD extends slide below 1.2450 amid a stronger USD
GBP/USD dropped further and hit fresh daily lows below 1.2450 amid a stronger US dollar. The Greenback remains firm following the release of the US May jobs report. Despite losing almost 100 pips on Friday, GBP/USD is still on track for a weekly gain.
Gold falls below $1,960 as US yields rebound after US jobs data
Gold price turned south and declined below $1,960 on Friday. After the data from the US revealed that Nonfarm Payrolls rose 339,000 in May, the benchmark 10-year US Treasury bond yield gained more than 2% and recovered toward 3.7%, weighing heavily on XAU/USD.
Terra Classic price up 35% as whales buy LUNC for v2.1.0 parity upgrade
Terra Classic (LUNC) has turned bullish, inspired by a recent announcement of the version 2.1.0 upgrade. The news has awakened the altcoin from a deep slumber, inspiring hope among token holders as the nominal increase shows signs of sustaining long-term for the token.
Week ahead – RBA and BoC to hold rates but might be tempted to hike
Policy decisions from the RBA and the Bank of Canada will be taking centre stage next week amid an otherwise light agenda. In the US, the ISM services PMI will be the only top-tier release and now that Congress has averted a default by suspending the debt ceiling.