US500 +1.96% Add to/Remove from Watchlist Add to Watchlist Add Position
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What to expect in terms of market performance in May?
The recent expansion of the monetary base following the pandemic has generated enormous liquidity in the US banking system.
When banks have too much liquidity, they can become reckless and engage in the wrong investment strategies.
This has been the situation in which Credit Suisse and many US banks have found themselves, with a fatal outcome for some of them.
Banks are trying to de-risk their loans, but to do so, they need to shorten the maturities of their loans, which means less long-term lending (mortgages).
However, it is now too late: with the arrival of the recession, the mortgages in the portfolio will lose value and this could cause a sharp decline in the market.
A worrying signals also come from consumer credit in the United States, which, as shown in the graph, is constantly decreasing.
One of the first victims, Credit Suisse, was bailed out, but failed to pay the Additional Tier 1 bonds which were considered very reliable.
Analyzing the Shiller PE ratio, an equation that measures the ratio of price to cyclically adjusted earnings, we find that the current stock market is as overvalued as it was at the height of the 1929 bubble, with readings just below the 30 threshold in both cases.
The sharp drop in First Republic’s shares, down 80% this week, could make the Fed think again about a possible rate hike.
On Wednesday, they tried to get the bigger banks to buy the long-dated bonds above market value, but without success.
For this reason, it seems that the hypothesis of a pause on May 3 has become more evident.
In my view, the Fed will not slow down as history shows that rate hike breaks can lead to increases in inflation, as happened in the 1970s.
According to the Commerce Department’s initial estimate, US GDP increased 1.1%, which is lower than the forecast growth of 2.0% and slower than last quarter’s growth. The economy experienced a decline in private inventory investment and residential fixed investment, as well as rising imports negatively impacting growth.
The market crash will start in the US because stock prices are higher than in Europe. After that, we will also see a decline on the other side of the Atlantic.
With the market crashing, I decided to invest in the Vix, also known as the Fear Index.
It is based on options on the S&P 500 index, with which it has a negative correlation: if the S&P 500 falls sharply, the VIX rises.
My first target is 30 and according to my model in the coming quarters we will see 3700 on the S&p 500.
If you want technical and/or psychological support from me, you can google me or write a comment below the video.