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Letter 28 – June 24th, 2019: The magnificent seven for a bullish melt-up ...

In the psyché of investors, Circé, or the return of QE, is creating a goldilocks environment for markets, which would propulse all the more bonds and equities to new highs, that positioning stays too cautious. That was true 5 to 10 years years ago, it is becoming really more complicated today. The rosy case for the S&P500 rising to 3050 and then 3200 would probably require the magnificent seven.

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Letter 27 – June 18th, 2019: Circé is here to stay…

Mario Draghi pushed Jerome Powell to the dovish side on Tuesday with his speech at the ECB’s Sintra conference, by suggesting that rate cuts and that more QE could be on the table in the absence of an improvement in the inflation outlook. On wednesday, The Fed signalled it will ease. The switch from QE to QT is over now and central banks are synchronizing their dovish monetary policies once again. At the same time, an imminent US-China trade ceasefire and a too cautious positioning from investors could create a fast bullish melt-up.

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Letter 26 – June 10th, 2019: Dead-cat bounce below resistance … reduce recent long trades

Despite global activity data generally undershooting expectations , most major markets rose more than 4% this week, because they were too oversold and the Fed signaled an openness to easing. But is it really right ? Is a coming Fed cut, a booster ? or the ominous sign of a coming of recession? Lower 10 year yield & an inverted yield curve favour the latter. What could we expect for equities in this development: the chart below shows that a falling yield curve precedes by 36 months the rise of the VIX – not very encouraging.

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Letter 25 – June 3rd, 2019: Oversold short-term, dead-cat bounce coming…

In the very, very near-term, it may not be wise to aggressively press shorts given the potential for some of the trade headwinds to reverse(Mexican officials will be in Washington over the coming days w/a “summit” scheduled for Wed while the G20 fin min and leaders summits occur this month too) and a lot of the most cyclical groups have already enormously underperformed.  However, all rallies will be viewed as selling opportunities and the SPX/NDX will struggle to stay above 2800/7500 (w/2850 an absolute ceiling and 2900+ a near impossibility).

With last week breakdown on global equities, we are now closer to our downside target on the S&P500, which is 2721. An A-B-C corrective wave pattern would predict a rebound from 2721 towards 2810-2864 before a C down leg towards 2615. Our short term US SC sentiment indicator is in a too bearish territory and signals that the S&P500 could rebound at any time (may be today).
We observe a recent out-performance of Emerging equities, which we identified a few weeks ago when we partially closed our short on EEm. Also Semiconductors have stopped under-performing the benchmark, while being oversold with bullish diverging RSi (see chart below). Thus we decide to close our short on the SMH at the open.

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