If someone says, “all signs point to a short-term rally,” they missed the short-term rally.

I warned on X that people forget sudden sharp moves can happen just before a larger decline takes place. So far, everything is going according to script.

https://twitter.com/leadlagreport/status/1709583759677247676

Just as everyone got nervous about a collapse in the stock market, stocks did what they always do – the opposite of what the popular narrative is.

Now, after literally just 6 trading days, I can see the bulls screaming again.

https://twitter.com/leadlagreport/status/1709544271051731149

All signs point to a potential Phase 2 of the credit event starting toward the latter part of October. Notice that while the stock market is rallying, defensive areas like utility stocks and yes, Treasuries themselves, are running faster. A rally led by defensive areas isn’t a rally. It’s a trap. And the fact that now we’re seeing the right kind of defensive behavior after a complete collapse in the weeks prior makes me confident that we must be close to something changing, or at least the conditions favoring a stock market accident.

What else is happening? We are finally starting to see credit spreads widen – the missing ingredient needed for the flight-to-safety trade in Treasuries to take hold. Junk debt appears to be underperforming relative to nominal. This is necessary for a tail event in equities to happen in my view, as it suggests default risk is getting repriced in highly levered bond issuers.

That default risk at some point filters through toward broader equity volatility. Interestingly, this is happening just as everyone seemingly assumes we are about to have a classic Q4 rally for equities. The rational contrarian seeing this would argue it’s quite the opposite.

The Bottom Line

I had a call earlier from an advisor who follows my content who wondered why I’m being so adamant on timing being critical here. It’s because of time itself.

https://twitter.com/leadlagreport/status/1711818409128714275

The crowd may be right on average, but never at the extreme. Ask yourself what the extreme narrative is now given the length of time it’s been told. Is it that the flight-to-safety trade is dead

? Or is it that stocks will rise into year-end because “it always happens?”

The point here is that the risk remains real, and I believe imminent. There’s far too much complacency, and if credit spreads do continue to widen, a trap door could open and make it hard for most to position into because of the speed with which it happens.

In the meantime, the offensive areas of the market likely will whipsaw, as defensive behavior finally trends, just in time for the next phase of the credit event to play out…

I will not relent.

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.