Are we potentially near to an inversion?
Just after the sharp drop of February-March 2020, my general opinion about the financial markets was not positive.
I was thinking that the US (and world) economy couldn't recover very soon, and - since the economy drives the market on the long run - I was fearing a second leg down, and new lows of indexes.
I was wrong about the response of the markets, but I think I was pretty right about the status of the economy.
The amazing rebound of the stock markets, started on March 23rd has continued for four months, and Nasdaq (IXIC) hit new All-Time-Highs several times.
S&P500 (blue line) and Dow Jones are lagging, because the recovery has been lead by few tech stocks.
Status of the economy on July 25th: macro data
I will save your time showing pictures and graphs you already know: the US economy is not in good shape.
House market is declining, Labor market is living an unprecedented crisis, there is a risk of Credit crunch, Manufacturing index is somehow recovering, but still under acceptable levels.
Inflation after an initial drop is getting higher, and only low prices of energy is keeping it at low levels.
Unemployment is not showing any "V" recovery, and the number of active spots of infection is not really under control in the US.
As I have already pointed out in previous articles, the only reasons for the markets' recovery are related to:
- FED intervention (most important reason, by far)
- The lockdown was just temporary, and consumers can go back to normal spending soon (which has only partially happened)
- Lack of alternatives for investors: big money had no other place to go than stock markets. This explains also why only few, giant stocks are leading the markets, while many are lagging.
After these four months, the prices of stocks (especially tech) seem extremely over any sense, and I am afraid that reality will revert prices closer to an acceptable mean very soon.
As always, I express my "gut feelings" in these articles, knowing very well that market can be "irrational" for long time. That's why I prefer to apply the HST model instead of being influenced by personal impressions and emotions.
SO, let's take a look back to the situation of the HST model:
it turned to Aggressive Long on April 8th, and kept this position so far.
The returns for memebers who decided to follow the HST model were impressive and strongly outperforming S&P500:
- HSTv2 is +98.1% since 04/08 and +37.5% since 12/31/19
- HSTv5 is +28.1% since 04/08 and +14.5% since 12/31/19
Recent drawdown of markets
- During last week, we have experienced some significant drawdowns.
Next few days will be very important to determinate if this was just a temporary break of the bullish time. In case there will be a strong recovery, the HST model will stay Aggressive Long, and improve its performance even more - In case the drop continues, I think we could see a longer period of higher volatility and decline in stock prices.
This second scenario is more likely in my opinion, as the few leaders stocks (tech sector) are showing evident signs of exhaustion, and it is hard to believe that lagging sectors (bound to the poor situation of "old economy") could be then ones leading a strong growth.
I suggest members to pay attention to our daily signal on Private Telegram Channel during next days, as the timing of our next trading moves could be very important and determinate the performance of last part of 2020.
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