Unusual Market Correction in US

28 May 2022

Dear Fellow Investor,

The US markets have suffered a 7 week consecutive correction which has not happened since 1934.  The headlines and financial blogs have been universally negative and scream of a market crash and possible recession. Fear and pessimism is at a historical extreme as measured by several sentiment indicators.

On Thursday and Friday  the Dow Jones, S & P, Nasdaq and Russel 2000 small cap index had dramatic reversals rising in the case of the Dow well over 1000 points. European and Asian markets followed. Up volume outpaced down volume by over 80 % showing buyers overcoming sellers.  Open interest on the index futures contracts reversed as short sellers covered their short futures contracts and reversed to long positions. Hedge funds dominate this space while big money institutions with their algos dominate the actual equity side.   The VIX index which signals fear and greed dropped from fear to neutral. 

Of major importance was the price action of the US 10 year treasury bond which is the interest rate benchmark for world economies. In the current environment of extreme uncertainty and fear  a drop in the US 10 year bond shows panic liquidation of all risk assets including gold, equities, bitcoin, and a move to US Dollar cash and US T Bonds. If the US T Bonds move up gradually  it shows money is moving into risk assets. If the yield on the 10 year US  T Bond moves from the current level of 2.74 % to 3.5 % expect a world rally of risk assets.

The possible catalyst for this move was a statement by a US federal reserve governor on Wednesday that they may consider to slowdown interest rate tightening in September which would be just in time for the upcoming November election.   

The only thing in my opinion to upset the apple cart would be some black swan event not discounted by the market.  

On Friday, the Singapore and Malaysia ETF's EWS and EWM traded in New York were both up over 1 % signaling a positive start next week for our local markets. 

Take care
Bill

Should Biden's party lose power in November, expect inflation and energy prices to drop. Oil drilling in the US and oil pipelines will open which will mean the US will be energy independent again as when Donald Trump was president. The US will be able to resume exports to Europe and the UK.