The perfect trading set-up is unfolding. On one hand, stocks are pushing higher, and investor euphoria is abounding. On the other hand, multiple warning signs are popping up across the market. Long-term Treasurys are performing well. Utility stocks have climbed about 5%. Gold prices have soared by more than 6%.
It’s uncommon for these three traditionally defensive asset classes to move in such harmony, and historically, this kind of movement has been a precursor to a broader market shift. These are all warning signs.
However, while these signs point to the potential for a risk-off pivot, they do not guarantee one. This is much like how driving in a thunderstorm increases the risk of an accident but doesn’t ensure one will occur.
For several weeks, I have argued that March could herald the onset of these changing conditions. Gradually, the signals have shifted toward a more neutral market position. This week, the transition really started to accelerate. Why is money rotating into defensiveness amid a big momentum uptrend? Because market participants are starting to hedge against potential volatility or economic slowdown.
Investors seem to be looking past the recent rebound in inflation, but this may be an oversight.
It is critical to recall the events of 2022 when surging inflation led to a correction across stocks and bonds, sparking an aggressive cycle of Federal Reserve rate hikes. While the current rise in inflation is not as sharp, it is still significant enough to cast doubt on the prospect of future rate cuts.
The Bottom Line: Brace for a Stock Market Crash
Market expectations have shifted from six anticipated rate cuts to merely three, with the timeline for these cuts being pushed back yet again. Moreover, Federal Reserve member Raphael Bostic has intimated that the Fed might only lower rates twice this year, with a possible pause in between. This indicates a more hawkish market sentiment building up, a trend echoed in the performance of utility stocks and gold.
This market rally, in my view, seems to be approaching its near-term peak. Previous rallies in defensive assets have been fleeting, but multiple signals are echoing the current cautious tone.
And while a major risk-off pivot is not a certainty, the conditions for such a shift are increasingly evident. The defensive asset classes’ unison movement is what matters here, and the fact that it’s happening during a bubble of speculative trading screams that something could be about to break. Be warned.
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.
