One More Rally Before the Crash

My stop loss over the next 4-6 weeks while I expect this risk-on phase to play out is simple: a weekly S&P close below 1267 would for me be very bearish and likely change things. But as mentioned, instead I expect to see markets struggle with headlines and volatility, but ultimately climb the wall of worry up towards 1400, perhaps 1450 S&P.

And then? Well, again things are largely unchanged from my April note. Much beyond late July or early August, and assuming we get to 1400/1450 S&P, I then would look to position for an extremely bearish risk-off phase over late August through to November or December. The drivers of this extremely bearish expected phase are not new: overly bullish positioning and sentiment; weak global growth, not just in the eurozone but also in the US and the BRICs; the next leg of crisis in the ongoing eurozone debacle in my view; and of course the looming US fiscal crisis, which in my view is not even "slightly" priced into markets, but where I feel the probability of a crisis is close to 75%. Hopefully by year-end US sell-siders will realise that blaming the eurozone crisis for everything that is going wrong in the US has been a serious error, which has resulted in them being blind-sided to the other real „gorilla?s in the room? – namely the US debt/fiscal weakness, and the hard landings now beginning in the BRICs.

My forecast for this extremely bearish risk-off phase over late Q3 and Q4 is that the S&P500 trades below the low of last year, perhaps as low as 1000 +/- 20. The iTraxx Crossover index should over that period widen from around 550/600bp (my end July/early August risk-on target) out all the way to certainly 800bp, and more likely closer to 1000bp. And we should see core bond yields rally hard – I expect 10yr UST yields to rally from my 2.35%/2.45% end July or early August target, all the way down to 1.5%, maybe even lower.

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Bob The Bear Is Briefly Bullish... Before Things Go Boom
By Bob Janjuah

Volatility is picking up as the markets swing back and forth on each new data point or rumor. Bad economic news is once again good for markets, which are salivating over the potential for more monetary stimulus from the Fed next week. With expectations for further easing moving higher by the day, the chances that Bernanke May Disappoint Pavlov's Dogs continues to grow. Most market participants also expect the Greek elections this weekend to be won by pro-bailout party New Democracy, who would then form a coalition with Pasok. Syzria, however, should not be counted out and would likely be a negative surprise to markets.

The potential for either of these unexpected outcomes, in my view, is far higher than markets are currently discounting. If I’m wrong, markets may very well follow the trend laid out by Janjuah (since neither outcome resolves the actual problems). If I’m right, the markets may be in for a nasty surprise shorter-term.