The S&P 500 and Nasdaq closed above the 20-month moving average in May, which could mean the worst is over for US markets, Elliott Wave analyst and the founder of financial services firm Indiacharts Rohit Srivastava has said.
“Back in 2008, the indices did not see any massive crash once they recovered above the 20-month average. In that sense, May closing was a good sign that the worst is possibly behind us,” Srivastava told Moneycontrol on June 2.
Investors have been building short positions over the past seven-eight months on negative news flow about a possible recession, the banking crisis and the debt ceiling impasse. At 4.34 lakh contracts, the short positions on S&P 500 futures are at the highest level in history. Meanwhile, markets have been steadily moving higher.
On the other hand, inflation in the US is headed lower and Srivastava expects the trend to continue for the next six months. The annual inflation rate in the US has fallen sharply since hitting a 40-year high of 9.1 percent in last June.
“Inflation is still above the Fed’s target of 2 percent but it is slowing persistently. At the same time, you do have a strong labour market. GDP numbers are not in the negative territory, which means there’s no recession yet. So why would the Fed raise rates further only to slow down the economy?” he said.
The second sign of a short squeeze is coming from the bond markets. In the past few days, as debt default was averted, the US 10-year treasury yield cooled to 3.3 percent from close to 4 percent levels. “It will eventually fall below 3 percent,” Srivastava said.
A short squeeze is a sharp rise in the price of a stock, forcing short sellers to liquidate their positions., pushing the price further up.
“As you start seeing bond yields decline, the markets are going to be front -running the idea that rates will eventually come down. Though the Fed may not move rates immediately, markets are always discounting the future," he said. The expectation that rates will eventually come down because of slowing inflation will drive equity and equity valuations higher again, Srivastava said.
At the moment, tech stocks, especially AI-related scrips, are driving the markets higher in the US. Dow Transport, Dow Utilities and Russell 2000 are still languishing near their lows.
“We did see a slight recovery in the Russell and the banking index in the past few days. Once the broad market joins these handful of tech stocks, there will be no stopping the greatest short squeeze of the decade,” said Srivastava.
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