I’m asked often “What is your biggest concern that could hit the markets?” It’s the bond markets and the incredible amount of issuance in the last decade. Does anyone remember the last bond bear market? No. There really hasn’t been one although there have been periods of severe stress on the bond markets. The debt problem in the early 2000s was started with consumers becoming overleveraged with the housing sector which then they blew up which lead to banks bailing out the consumers levering up 40x backed by housing “which has never crashed” and when it all blew up the Fed bailed everyone out while taking on the risk to its balance sheet. After the great financial crisis, Ray Dalio wrote about the coming “Great Deleveraging” which really brought his stature to the public forefront. His belief simply at the time was deleveraging would occur perhaps after the lessons learned in the previous years. Sounded like the responsible thing to do at the time.
US Banks did de-lever their own balance sheets to mandated levels and cleaned up some risks. This never happened in the corporate credit markets as it turned into the great re-leveraging occurring over the next decade-plus. The Fed enabled this by keeping emergency ZIRP (zero interest rate policy) for too many years after they enacted it. Sure, Yellen and Powell did raise rates gradually for a few years until Powell did a 180 pivot as the markets were dropping. At the time, China was facing some stress in its markets, and the US equity markets were down 20%. That was all that it took to spook Powell to change his policy direction. “Save us all-powerful Fed Chairman Powell we can’t watch the SPYs and Q’s drop another day”
Since then Powell remained very accommodative and 4 months before Covid the REPO markets revved up again as another sign of stress in the liquidity money markets started to appear. When Covid hit the Fed went overboard with way too much stimulus throwing every tool in the Fed toolbox at the markets and this included purchasing investment grade and high yield ETFs. This was the tell that the Fed looked at the corporate credit markets as the linchpin.
How about Europe? In the US the amount of debt is enormous both with corporate credit and Treasury debt however the Ponzi scheme in Europe with the ECB is really scary. Remember the 2011 Euro debt crisis when rates spiked like crazy in Greece and other countries, the equity markets collapsed around the world? In order to keep this short, the ECB went into “whatever it takes” mode, and sovereign rates dropped and dropped and dropped some more (As Forrest Gump would describe rates going to zero and then negative). European banks and pension funds were mandated to buy more debt even with negative interest rates which are loaded now on European banks’ balance sheets. I asked years ago the Blackstone head of capital allocation why he was putting money into Europe with many managers buying negative interest rates and he said “because they believe rates will always go lower” thus keeping bond prices up. I’m not as smart as him but I thought this was bat shit crazy in the highest sense. The same in many respects happened in Japan and I’ll leave it there.
It’s been like giving drug addicts more drugs as a cure for their addiction. And now with US rates and other rates around the world moving higher thanks to the Fed and other central banks policies combined with trillions in fiscal spending it finally sparked inflation. For the debt addicts, this has been quite the bender. Add the fact a lot of high yield debt (high yield used to be called junk debt and actually had high yields) in recent years has been issued without covenants too. Covenant-free debt essentially masks risks companies might be experiencing where bond investors could force liquidation or other payments if there were covenants. This doesn’t even give the debt addicts time to go to rehab as it’s straight to the morgue when it blows.
My back of the napkin analysis of where the US 10 year yield averaged in the last 10 years is ~2%. The majority of credit issuance has occurred in the last 4 years and will affect pricing (eventually) as treasuries both on the short end and long end continue to rise. Perhaps a rapid spike above 2% on the 10 year is the breaking point? There’s leverage in every market and leverage in the credit markets has big risks that if stressed will cause liquidity events through every other market. In bad markets, there rarely is a safe place to hide as people will sell anything not nailed down. The recent pullback with tech also saw heavy selling in crypto. Selling always starts with the riskiest assets and then leads into the ‘safe stuff.’ I believe we’ve started to see the selling in the risky assets after a year of insane speculation with massive unprecedented inflows. If rates continue to rise and accelerate as I expect the risk of my biggest concern will increase.
I am sorry if I put you in a sour mood after reading today’s note. It is depressing to think about the what if’s however it’s important to recognize the risks well in advance of any type of pullback or something even worse. On the other hand, I’m also going to recognize when the risk-reward on the upside is favorable. And when I do as I have in the past at important inflection points, I tend to push a lot of my chips in at the table.
Today’s action has been drifting lower all day and risk remains to the downside. Add in the risk with crypto this weekend as it’s never been a comforting sign when they end the week on the lows.
trade ideas
I still like FXI long which I added yesterday with starter sized 2%. I have a few ETFs at the bottom. GDX, IBB, XBI, and SMH. I am holding off on GDX as a long, adding both IBB and XBI as 2% longs, and adding to the SMH short from 4% to 5%. I am adding to VIAC long too taking it up to 5% from 3%. If you followed my latest Tesla Feb 11 expiration 1050-900 put spread priced at $28.50 when I suggested it when the stock was near 1200 take some gains (half or all) as the spread is now priced at ~$65.
US MARKET SENTIMENT
Here is a primer on how we use Daily Sentiment Index charts. S&P bullish sentiment and Nasdaq bullish sentiment dropped again after yesterday’s action. Nothing matters under 50% breaks.

US MARKETS
Here is a primer on the basics of the DeMark Setup and Sequential indicators. S&P daily is quiet today holding the 50 day again. Still not oversold

SPY still holding the 50 day and off today’s low. Not oversold

NDX index broke the 50 day hard with clear support at 15,500

Russell 2000 IWM daily bounced back to the previous bounce after the first wave down. Now it failed again at the 50 day and still has a downside Countdown in progress.

Dow Jones as I showed the other day had a make-or-break sell Setup 9. The previous 9’s have been good inflection points and this looks like another with the price flip down. A “price flip” is defined as a contra-trend move identified by a close that is higher/lower than the close four price bars earlier.

viacom Cbs WORKING
I really like VIAC and it’s up strong today along with DISCA. I am raising my 3% sized position to 5%. A lot of tough resistance at 40 and my target is 50 in 2022

hong kong – FXI long starter position working today
There have been a lot of DeMark Countdown 13’s within the Hong Kong market in play. I added FXI as a starter long position yesterday. Still actionable

FACTORS, GOLDMAN SACHS SHORT BASKETS AND PPO MONITOR UPDATE
Factor monitor now has a reset YTD performance column with some factors down hard already for the year. What’s been working in the last 5 day and 1 month rolling continues to be bought today.

This is similar to the above monitor with various ETFs other indexes as I wanted to show the same 5 day, 1 month rolling as well the YTD and 1 year. Quite a lot are down YTD with most still above the 1-month rolling period.

This is the monitor that has the S&P indexes and the Goldman Sachs most shorted baskets. Today the shorts are getting squeezed overall with the baskets up more than the S&P sectors.

The PPO monitor (percentage price oscillator) force ranks ETF’s by percentage above/below the 50 day moving average. For information on this monitor please refer to this primer. This monitor is offered to Hedge Fund Telemetry subscribers who are on Bloomberg.

demark observations with GDX, IBB, XBI, SMH
Within the S&P the DeMark Sequential and Combo Countdown 13’s and 12/13’s on daily and weekly time periods. For information on how to use the DeMark Observations please refer to this primer. Worth noting: Still quite a lot of weekly Sequential and Combo 13’s and on deck 12’s. That’s a more intermediate-term risk.

ETFs among a 160+ ETF universe. Seeing a few buy signals starting to develop. Wait for price flips up for more confirmation. A “price flip” is defined as a contra-trend move identified by a close that is higher/lower than the close four price bars earlier. Price flip on FXI a new long idea.

GDX Gold Miners has a new Sequential and Aggressive Sequential buy Countdown 13. There is a pending Combo which would need a new low to qualify. If buying here use 28 as a stop

IBB Biotech with a new DeMark Combo buy Countdown 13 at the downside wave 5 target. Worth taking a small shot here on the long side

XBI has also some DeMark buy Countdown 13’s worth taking a small shot on the long side today

SMH Semiconductors breaking the 50 day. Support at 290 and then air pocket below
