Are we in the credit event I argued would likely hit towards the end of the year?
I believe so, yes.
Does that mean it will unfold for risk-on assets in one aggressive move or one single week?
Unclear.
I always say on X that “path matters more than prediction” and that is an undeniable fact. I could be right that we are in a credit event, but unless the sequence is tradable over a multi-week period, it doesn’t matter about the end point. What matters for traders (both systematic and discretionary) is the dance in between the endpoints – the sequence.
What Is Going on With Utility Stocks?
Here’s where things get tricky. I’ve referenced many times the fact that historically, the utilities sector is a leading indicator for stock market volatility and utility stocks tend to outperform in short time. The last three days have been remarkably surprising. When we look at the ratio of utilities against the broader S&P 500, despite volatility surging and the complete collapse of Treasuries (or perhaps because of it), there’s been a roundtrip. Utilities have utterly collapsed at a faster pace than the index.
Using my own rules-based research, this is actually risk-on.
In other words, the aggressive relative selloff is a risk-on signal in the very immediate short term. But the issue is that all that’s happened here is the ratio is we’re back to where it was four weeks ago, when it was already oversold. While the selloff was extreme and does signal risk-on, it’s now again back to significant oversold territory.
It would take 2-3 weeks for this to resolve itself. This is why I am again flagging the potential for another high-risk period for equities around mid-October (unless there is another massive relative spike in utility stocks, which is possible). Note I argued we were in a high-risk period in the last two weeks of September weeks beforehand and was right.
Some will argue this is me “moving the goal post.”
This is simply not true whatsoever. You can speed up for short bursts when it’s raining even though the conditions remain dangerous. I unequivocally believe we are broadly in a very dangerous juncture for bulls and bears in the potential of how this credit event could play out.
The Bottom Line
At some point, Treasury prices rally, and yields will fall, and stocks likely initially cheer that. But if those yields keep falling, investors will realize that the flight-to-safety sequence is underway as credit spreads widen. This is already starting to happen. The broader stock market will react negatively, a crash event will assert the return of Treasuries as the “pristine asset” as I alluded to yesterday, and correlations will revert to how they used to on average for most asset classes.
Regardless, this is going to be a difficult juncture for both pros and amateurs in markets. Staying open minded and evaluating conditions to determine potential path behavior is all I, and anyone that is truthful, can possibly do.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
