On Friday, I noted on X that I think we could see a very short-term relief rally in stocks.
So – I think path wise there’s a tradeable bounce next week.
Dollar could weaken and the surprise would be a big move up in emerging markets.
This would suck in some more bulls and set up for another high risk period mid-October.
If I’m right that Treasuries are the credit…
— Michael A. Gayed, CFA (@leadlagreport) September 29, 2023
My approach is short- to intermediate-term. I believe the credit event has started given the way global sovereign yields have acted over the last two weeks. That does not mean, however, that we necessarily see stocks collapse straight down.
Even in a rolling crash — which it’s possible we may have begun — there could be weeks where stocks rally nicely before making lower lows. Yes, I recognize that’s dangerous for most.
In my case, because everything I do is signals-based, sticking to what your quantitative work says matters more than an endpoint to manage the path with which you potentially get there.
The dollar here is a big tell for me in the short term. When we look at the Invesco DB USD Bullish Fund ETF (NYSEARCA:UUP), the weekly bars higher have gone through an incredible streak. This is as everyone was screaming “bearish” in July. I think the dollar is indeed vulnerable to a super spike, but the unrelenting nature of the trend makes me skeptical in the short term. At minimum, this trend is due for a pause.
Phase 2 of the Stock Market
If I’m right, that would serve as a reprieve for risk-off sentiment, and momentarily be a positive for emerging market stocks that tend to benefit from a weaker greenback. However, I don’t think a reprieve would last long.
So, let’s make it ultra clear what I believe conditions favor.
- I believe the credit event is underway, and sovereign yield volatility is the source.
- Within that event, there are likely tradeable rallies to suck in more bulls, which I believe this week could be an example of.
- The next phase which I estimate can begin in the middle of the month would be Treasuries rallying in price (dropping in yield) as stocks begin to realize that a sovereign credit event can’t be isolated to governments which tax their citizens.
- Credit spreads widen, the risk of a tail event shifts to equities, and it turns out July was indeed the top for the stock market this year.
The Bottom Line
With all that said, I could UNEQUIVCALLY be wrong. But I will NEVER apologize for warning people to slow down entering a storm. I have seen those on X try to come after me with no counter-analysis saying, “where was your September credit event?” However, they totally ignored the behavior of Treasuries, the most important asset in the world, glitching all over the place.
We are in a dangerous juncture. Markets humble us all, just not all at once. And I think everyone is going to have a hard time managing through this because of the way the path can play out.
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.