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Indices Analysis – The Fear Factor – Mar 20

The last week has confirmed that, so far, the major domestic and international weapon of the Trump administration is rhetoric. It is quite an achievement that, within 2 months of Donald Trump’s inauguration, he succeeded this weekend in removing the G20’s apparent commitment to fight protectionism.

How? Fear. Few countries wish to be excluded from favorable trade terms with the mass market that the US represents and therefore will not prejudice their position by fighting a war of words. Hence this weekend’s G20 statement could have been written by Steve Mnuchin. But like many aspects of the Trump phenomenon, it is action that creates sustained consequences not rhetoric. Although protectionism is ultimately bad for global stock markets and possibly the cause of the eventual end of the current blow out, so far the evidence for an actual curtailment of global free trade is limited. Ironically the bark of the protectionist dog may serve to exaggerate the blow out even more — until the bite (crash).

This extreme potential is reflected by the structural matches of all four major US indices to their first legs in 2009-2010.

Neither DJIA nor SPX have met their once aggressive but now conservative equality matches. But the fact that both the (arguably clearer) Russell and NASDAQ have and are set for the ambitious targets suggests this blowout has much more to run. Buying (extreme) dips remains the mantra of 2017 but when? When the market is also most afraid.

Our suspicion that the weekend play was VIX proved valid even though the substance for such a break higher is more a delayed disappointment to the Fed and indeed the post Trump event fractal we highlighted last week. This continues to flag the risk of a larger correction this week as the USD curiously continues to lead yields that are, in turn, leading SPX.

Fortunately all 3 of the above charts show clear conditions if not levels for when we can rejoin the uptrend in what have a sting in the tail. And as the market capitulates this week, NIFTY’s 10K Road Map (in today’s update) shows how an over-commitment to bearishness at this juncture is playing with fire.

Outlooks: (for analysis subscribers only)