What follows are the topics covered in this weekend's note to subscribers. To become a client of Zenolytics Turning Points or to learn more click here.
In this weekend's 13 page note we discuss:
- The shifting liquidity foundation of the markets
- The potential for early "risk on," "risk off" warnings from the currency markets
- Gold and silver
- The real technical signal that the Nasdaq and S&P are sending after this week
MARKET UPDATE
Let's begin with what is the most important underlying movement in the markets over the past month. The liquidity foundation of the market has shifted from the post virus crash, QE induced framework to something much different.
Typically, when the liquidity foundation of the market shifts, as it has over the past several weeks, risk becomes an issue. However much the market chooses to ignore the risk determines the severity of the downturn when the risk is recognized by the markets. In other words, the longer the markets delay recognizing risk, the more potential for a significantly negative outcome over a short period of time.
Of course, it goes without saying that we are in a political/macro environment that is unlike anything witnessed in quite sometime. In a little more than two weeks one of the most anticipated elections will arrive on the scene while investors who are seemingly concerned about potential instability as a result of any myriad of unpredictable election outcomes have decided to take the road most traveled by declaring their complete faith in the Fed, with any potential weakness in equities being nothing more than a blip on the radar before they are rescued, being made whole once again.
When one takes into account the liquidity foundation of the markets; the pervasive use of leverage by investors; the exposure levels of all classes of investors; and the emerging risks chasing the market from behind, then we are left with an environment that can get slippery quickly.
This is no longer the market of Q2 and most of Q3 when you could be confident that downside slippage would be negligible, making most any dip a buying opportunity, with the ability to leverage significantly. That's what you get when the liquidity foundation is intact, while investors have yet to fully embrace the bullish argument, remaining cognizant of risk that is in the rear view mirror, which naturally creates the necessary wall of worry for the markets to climb.
As it stands presently, the majority of investors who are significantly exposed to equities are underestimating their risks, while blindly putting faith in a Federal Reserve that has made it clear that the next phase of stimulus should involve fiscal measures that likely won't come to pass until either A) the market declines significantly or B) early next year.
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