Europe Breached Support. America is Following
The markets are weighing mainly two events, the geopolitical environment and the interest rates. Sadly the world has witnessed the conflict in Ukraine, a a war that nobody will win, and everybody will lose. The markets always react negatively to bad news, and uncertainty.
On December 2021 the SP500 reached an All Time Highs (ATH) as well as the Dow Jones, but not the Russell 2000. "The Russell 2000 is managed by FTSE Russell and is widely regarded as a bellwether of the U.S. economy because of its focus on smaller companies that focus on the U.S. market." [1]
Russel declined and to this point is pointing below the 90 MA in the Madrid Ribbon. This is bearish as this acts as an important support/resistance level, if this goes down then the market most likely will dive to test the support at the 200 ma.
The markets in Europe had a big crash last week, sending the main indexes like DAX, CAC, FTSE to bear market territory. The world markets are interwoven, and in tandem, what affects the markets in Europe will affect the markets in America sooner rather than later.
People are buying protection, the VIX has been most of the time above the 20 level, which signals problems. Currently it's above the 30 level and it closed above the previous peak from November 2021. Usually volatility has been below the main Resistance level of the ribbons, but recently it broke above the 200ma in the Weekly timeframe, this is absolutely not good. The market senses something big is coming.
The interest rates set by the fed, which have been broadcasted overtly to be 0.25 by the end of march, is like a big "Road Closed" sign miles from the construction site. Traditionally the Fed has been announcing the interest rates on the same day in their conferences. The pressure at this time mounts because of inflation. The main lever that controls the economy is the interest rate, the lower, the more accessible becomes the money, the higher the more expensive it becomes. When the economy has easy access to money it grows, but if it grows too much and the supply doesn't grow at the same pace the imbalance points to the bid side and it makes the goods and services more expensive.
The two main indicators to monitor the economy for the purpose of the interest rates are inflation and employment, when employment is at its lowest levels it means there's full employment and a working economy, it's the time to start raising rates to prevent the economy from overheating and making inflation go higher or even out of control. Once the economy slows down interest rates will have to reach a level that allows stability and avoid the economy to stall and send it to a recession. This is known as deleverage of the economy [2] and it hurts because we see slow growth, fall in the financial markets, more expensive credit.
The formula is simple (not easy):
I. INTEREST RATE HIKE -> Lower Economic Growth -> Slower Inflation higher unemployment.
II. INTEREST RATE CUT -> Higher Economic Growth -> Faster Inflation, lower unemployment.
The economy deleverage can be smooth, but it requires the Fed to be raising rates when they can, not when they must.
“Fear is a stronger emotion that hope, which is why bear markets are always swifter than bull markets.” — Unknown
[1]: Investopedia : What is the Russell 2000 Index
[2]: How the Economic Machine Works, by Ray Dalio youtu.be/PHe0bXAIuk0
On December 2021 the SP500 reached an All Time Highs (ATH) as well as the Dow Jones, but not the Russell 2000. "The Russell 2000 is managed by FTSE Russell and is widely regarded as a bellwether of the U.S. economy because of its focus on smaller companies that focus on the U.S. market." [1]
Russel declined and to this point is pointing below the 90 MA in the Madrid Ribbon. This is bearish as this acts as an important support/resistance level, if this goes down then the market most likely will dive to test the support at the 200 ma.
The markets in Europe had a big crash last week, sending the main indexes like DAX, CAC, FTSE to bear market territory. The world markets are interwoven, and in tandem, what affects the markets in Europe will affect the markets in America sooner rather than later.
People are buying protection, the VIX has been most of the time above the 20 level, which signals problems. Currently it's above the 30 level and it closed above the previous peak from November 2021. Usually volatility has been below the main Resistance level of the ribbons, but recently it broke above the 200ma in the Weekly timeframe, this is absolutely not good. The market senses something big is coming.
The interest rates set by the fed, which have been broadcasted overtly to be 0.25 by the end of march, is like a big "Road Closed" sign miles from the construction site. Traditionally the Fed has been announcing the interest rates on the same day in their conferences. The pressure at this time mounts because of inflation. The main lever that controls the economy is the interest rate, the lower, the more accessible becomes the money, the higher the more expensive it becomes. When the economy has easy access to money it grows, but if it grows too much and the supply doesn't grow at the same pace the imbalance points to the bid side and it makes the goods and services more expensive.
The two main indicators to monitor the economy for the purpose of the interest rates are inflation and employment, when employment is at its lowest levels it means there's full employment and a working economy, it's the time to start raising rates to prevent the economy from overheating and making inflation go higher or even out of control. Once the economy slows down interest rates will have to reach a level that allows stability and avoid the economy to stall and send it to a recession. This is known as deleverage of the economy [2] and it hurts because we see slow growth, fall in the financial markets, more expensive credit.
The formula is simple (not easy):
I. INTEREST RATE HIKE -> Lower Economic Growth -> Slower Inflation higher unemployment.
II. INTEREST RATE CUT -> Higher Economic Growth -> Faster Inflation, lower unemployment.
The economy deleverage can be smooth, but it requires the Fed to be raising rates when they can, not when they must.
“Fear is a stronger emotion that hope, which is why bear markets are always swifter than bull markets.” — Unknown
[1]: Investopedia : What is the Russell 2000 Index
[2]: How the Economic Machine Works, by Ray Dalio youtu.be/PHe0bXAIuk0
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