Navigating the Financial Tightrope: Market Stability and Economic Warning Signs

The Donald has called for Republicans to default on America’s debts unless major budget cuts are agreed to. Still, the market, being so stubborn, refuses to fall. It seems as if all the necessities factors for a major downturn are in place: high interest rates, a crisis in the banking sector, persistent inflation, a looming recession (if it has not already begun). Add to this the tense situation in the corporate debt market. And the possibility that corporations may face cash flow gaps. And the enormous and, most likely, largely unsolvable problems in the commercial real estate sector. And the possibility of mass layoffs. It’s beginning to look like the formation of a perfect storm.

Let's recall how many major companies have announced cuts in the past six months to a year. Elon Musk predicts trouble, while well-known investor and author Robert Kiyosaki outright forecasts an explosion in the financial system, advising people to look towards precious metals. The "talking heads" never tire of spreading negativity, and right now, there is no shortage of negativity for them to spread.

Yet—again—the market stubbornly refuses to fall. What is going on? Let's take a look.

1. Usually, when markets fall, the dollar begins to strengthen. A certain risk-off occurs. For now, the dollar also remains strong, “bouncing back" from the DXY lows. Accordingly, it has risen slightly against the Euro and other currencies. Trivial matters, you might say! But at the same time, it seems the dollar is not poised to strengthen further. In other words, investors are more likely willing to take on risk.
2. We don't see any significant trading volumes or a desire to sell. Trading volumes are consistently low. On May 10, we observed the lowest trading volume since the beginning of the year. It feels as if it's not May, but rather late July or August, when many traders are off on vacation. Simply put, this is not good. In such a situation, both a drop and a short squeeze are possible. Volatility is extremely low.

What comes next?

It's hard to say for now. Big players prefer not to take unnecessary action and are thus currently maintaining a wait-and-see approach. Personally, I think this illusory well-being could explode at any moment. Moreover, the movement could be either downward or upward, with equal probability. However, due to the presence of so many factors pointing to a decline, I certainly wouldn’t put my money on it. At most, we could see a rise to around the 4250-4300 level. It seems like the market will try to squeeze out short-sellers. But when the overall mood changes and it seems that everything could end well, that's when a collapse might happen, just after short-sellers have been squeezed out of their positions.

What are we to do?

Our main shorts in SPXU (a leveraged short ETF on the S&P 500 index) are the least volatile of all instruments. Even if the market moves to the 4250 level, this instrument won't fall too much. We are mainly hedging using SPXU. If we see the market's readiness and desire to fall, we can strengthen our shorts. However, I believe that increasing such a high-risk hedge now would be dangerous and foolish. Therefore, we'll strengthen our positions if we see market weakness, which is not present yet. For now, the situation is similar to the case with gold - neither here nor there. In other words, it's too early to buy, but also too early to sell. We sit and wait. In the last few hours, I've noticed that the dollar index has slowly begun to rise. It was 1.099 against the euro in the morning, and now it's at 1.093. The dollar has started to strengthen. I recommend paying attention to this, as it might be a small signal that we could eventually see a market crashing into the red, even despite the fact that futures are currently green.