Sound The Alarm
Breaking News: War in the Middle East.
In this special report, I will discuss the various factors affecting markets in the week ahead.
First off, let's rewind to this past week, Wednesday April 10th which was the day that the CPI release imploded the market. Later that afternoon, the selloff accelerated when we learned that Israel and Iran had been trading threats back and forth for over a week:
April 10th, 2024:
"The leadership of Iran has repeatedly vowed to avenge the deadly April 1 strike on an Iranian Embassy building in Damascus"
But then a funny thing happened on Thursday, a slightly better than expected PPI report sent the Nasdaq to a new all time high. In other words, the Iran threat was totally forgotten.
On Twitter, I posted this chart showing that the divergence of Nasdaq stocks NOT above the 50 day moving average at an all time high, was the largest since the November 2021 all time high:
So Friday morning rolls around and what happens? JP Morgan reduces their forward guidance, so once again stocks implode. And, by the end of the day, investors remember the Iran threat which had been conveniently forgotten for 24 hours. However, shorts covered into the Friday close and the VIX pulled back from its high of 19 back to 17 going into this weekend. Why is not for me to say. Because here we are on Saturday, markets are closed, and guess what Iran is drone attacking Israel in what could be a significant escalation of their proxy war which started last October. Again, is this really a surprise?
Here is where it gets interesting for markets:
The net effect of the hot CPI we received this past week is that stock market bond proxies aka. recession stocks got decimated, led by Real Estate Trusts (REITS), Consumer Staples, and Healthcare. This class of stocks is often called "Low volatility", because they are deemed the safe havens. And yet they were the worst performing stocks in the market this past week. Here we see that every time the low vol stocks broke the 50 dma, the S&P 500 has traded down below the 200 day moving average over the past two years. Which portends a minimum decline of -15% for the S&P 500.
Obviously, it could be far more.
The other problem for bulls is that the Fed will be highly reluctant to bail out markets this year due to the election AND due to the recent high inflation readings. I suggest that compared to March 2020, the Fed will be slow on the draw bailing out markets this year.
Here we see the high yield spread - which is a proxy for financial risk - finished this past week back at the TWO decade low signaling mass complacency in financial markets:
The only market that's open right now are the Crypto markets, and if those are any guide, this could be a difficult week for markets. The immediate kneejerk reaction for Bitcoin was to tank -10% and then it recovered partially. For the rest of the Crypto space, the carnage was much worse.
At today's lows, Ethereum was down -33% off the recent March highs:
Gold already had a huge run INTO this event, because gold has been leading the reflation trade which includes oil, commodities, and financial stocks.
The question on the table is can a cycle overbought precious metal be a safe haven in a market meltdown? The answer in March 2020 is no. It was not spared the initial downside carnage.
Even long dated bonds have some risk if March 2020 is any guide. Yes they recovered first, but only AFTER the Fed panicked. And the Fed only panicked AFTER the T-bond market crashed. And then when the Fed panic cut rates in 2020, the market was limit down and when the Fed restarted QE, the market was limit down.
In summary, markets KNEW this was going to happen, and yet they are still NOT prepared for an escalating war. I am not predicting what will happen on Monday, but suffice to say, if global markets are RISK OFF then this market will explode.
