Let’s not bury the lede.
Phase 1 was the Treasury credit event that began toward the last two weeks of September.
https://twitter.com/leadlagreport/status/1697657097339490654
Phase 2 could very well be a corporate credit event.
I find this chart to be a bit eerie. I looked at the Dow Jones Industrial Average in 1987 and how the Nasdaq-100 looks in the year to date, normalizing the scale. I’ve shown this a couple of times throughout the year, and the most recent update is pretty remarkable.
https://twitter.com/leadlagreport/status/1709921945758687331
I keep emphasizing that I’m normally not a fan of these types of charts, but it does line up with other intermarket analysis work I do at The Lead-Lag Report.
What’s interesting this time around is it looks like long-duration Treasuries relative to intermediate-duration Treasuries may have found a capitulation bottom. Why is this consequential?
How Stocks Could Crash This Month
Because this is grossly oversold, and a risk-off scare in stocks would force the ratio between the two meaningfully higher. If the ratio is indeed in a “capitulation” phase (meaning it’s THE low), then stabilization in the weeks ahead could pave the way for it to turn higher (meaning long-duration Treasuries outperform intermediate-duration – precisely the risk-off signal documented in one of my research papers).
The same can be said of utility stocks. Yes, this too looks like a capitulatory bottom in the relative weakness of utilities and the broader stock market. I’d go so far as to say utilities will outperform technology stocks
in the next 12 months, and that could very much be front-loaded in the coming weeks.
Now let me be clear: I am biased. Personally and professionally, I do need the flight-to-safety behavior in long-duration Treasuries, for a moment in time, to reappear. A stock market crash would do it, but the problem is no one would be positioned for that because apparently everyone thinks Treasuries are broken as a safety trade. In 1987, yields surged and then collapsed as Black Monday took place.
This isn’t some fearmongering or click bait. This is about scenario analysis and considering all possibilities. There is precedent for a stock market crash to hit toward the end of October. All this, from a path perspective, is oddly consistent.
Maybe it doesn’t happen. Hell, maybe it happens in early November instead to really throw everyone off. Either way, this is about conditions favoring an accident, and to deny the very real possibility that we could be on the edge of one, when sovereign debt is trading with the volatility of a shitcoin in 2021, is beyond naïve.
Path matters more than prediction, but what if the path is the prediction?
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.
