Credit Rumbles But Juice Left to Squeeze

Rising Rate environment.  War in Europe.  Inflation printing at levels seen 50 years ago.

Known knowns so they’re priced in, right?  I suspect so.

Last week’s price action in equities is being widely viewed as a short-covering event.  And there is a plenty of evidence to support that notion, which I agree with.  But that doesn’t mean we haven’t seen a potential legitimate shift in animal spirits for risk assets, at least in the short term.

We’ve gone from 0.00% to 0.25% on the Fed Funds rate.  Threats of an additional 50 basis points if and when needed at any of the next FOMC meetings and potential initiation of balance sheet runoff by the start of Summer

With 6 remaining meetings in 2022, you at least have a printed schedule of interest rate risk-events.

2022 FOMC Remaining Meeting Schedule (b)

If the known knowns are essentially priced in, then how much volatility is left to sell and hedge?  Which brings me to junk or rather high yield (HY).  With the start of the year, the HY spread began to widen, but I suspect with current risks digested, people are still going to stretch for yield.

Over the past few years, each spread-widening event has been met with subsequent compression.  Observe.

HY Option Adjusted Spread

Why?  Because interest rates are so low and capital requires yield.  End of story.

Rates are still historically low and the Fed’s balance sheet liquidation process still awaits.  This means liquidity.  Recession risk is obviously rising as earnings will assuredly contract, but again, what’s priced-in in the short-term?  I’d wager more than speculators suspect.

HYG is sporting a meaty 4.25% yield and a slight discount to NAV to boot at the time of article composition.

Sentiment in HY has reached an extreme, as observed in the HY McClellan Summation (courtesy of SentimenTrader).  Observe an extreme not seen since the GFC.

HY McClellan Summation (3-21-2022)

Additionally, debt-volatility as measured by the MOVE (courtesy of TradingView) has begun to abate.  Is the worst over?  Not sure, but there’s enough signs to wager yes in the short-term at the very least.


Let’s take a look at HYG from a technical standpoint.  A couple of things jump out.  One, the buying thrust in volume last week (200M+ shares traded).  Over the past few years, this level of green volume has typically led to solid, multi-week or month rallies as noted by the yellow circles.  Couple failures (red circles) in 2020 as the world was being taught how to live with a pandemic.  Different environment now.

HYG (3-21-2022)

HYG has also bumped down into it’s 150-week EMA.  Nothing magical about that, but it did prove to be a stopping point at the end of 2018 when people were thinking the next GFC was upon us.

Huge risks are everywhere.  None can be marginalized but they do have to be appropriately discounted and I think the markets are doing that now.  If you’re looking for yield and maybe a bit of capital gain, HYG is worth a look at structuring a play.

A Rising Tide Lifts All Boats

There’s a ton of divergences occurring. According to some “expert” voices in the blogosphere, the divergences don’t matter. That’s nonsense. Divergences do matter. They provide signals that can assist speculators on when to or when not to allocate capital. Additionally, maybe certain divergences signal to take some risk off the table. Sure a perma-bear or perma-bull can find enough signals in any nook or cranny they search to warrant their stated opinions, but that’s the nature of data and confirmation bias.

I would say caution is warranted across multiple markets. High-yield bonds i.e. junk bonds finally sold off with a recovery into a potential double top for JNK & HYG and in an earlier post, I had stated that junk selling may be the final piece the markets would need to see for a significant correction to occur. That may still be the case, but there are enough other factors to justify a cautious stance. Everything happens so rapidly in the markets now, so if you’re not nimble then say goodnight to any short profits. The NYSE A/D line was descending but has since resumed its climb to reach a new all-time high. Small caps(Russell 2000) sold off 8% during that last month’s downmove and many published analysts thought that may be the extent of the move. Turns out they were right…for now. My go-to indicators show strong potential for a continued down-move, however one of the indicators is flattening in the short-term. If long-term resistance gets broken on the RUT? Well then more damage could be on the horizon for a larger swath of the markets’ asset classes.

Preferreds can sometimes be a leading indicator of deteriorating credit conditions, reason being because they’re primarily issued by financial institutions and REITS. Along with most everything else, we saw preferred stock funds temporarily turn down but have since recovered into a lower zone that’s been essentially flat for the last few weeks. There were some major M&A deals that were scrapped last month, but who cares. Who cares about anything in the game of speculation if it isn’t related to a central bank, right? Seriously, who cares anymore? Everything just goes up anyway. Who cares about technical analysis? You can’t trade without volatility. There couldn’t be a worse time in modern financial history for a trader to try and stake his or her claim in the world by beating the markets.

Before you assume it’s all sour grapes with me because of my own trading results, please understand that like any other prudent asset allocator I maintain multiple portfolios for various strategies. Most are dedicated to sound asset allocation strategy as well as conservative stock selection across the best companies in the world; the kind of companies that can weather any storm. As much as I enjoy fundamental analysis and good old stock picking through the breakdown of a company’s financial statements and filings, I get more of a kick out of trading on the price action. My smallest portfolio is my trading portfolio and thus that helps to mitigate the damage of the strategies I’ve been utilizing the past couple of years. So no I’m not entirely bitter because the big bad bully market took all my marbles. I’ve still gots me marbles and I’m still playing the game. Strategies have to be shifted in light of the current environment where HFT and central bank support dictates market movements and investor sentiment. I’m certainly not alone in my mediocre trading results of the past couple years.

Up until 2012, the arcane magic of technical analysis still worked quite nicely. You could still use decades old strategies based on squiggly patterns of price & volume to regularly snag profits out of the market. But what does it say to you when some of the most respected traders of all time are consistently losing? What does it say to you when three of Schwager’s Market Wizards who run billions in AUM continue to come up with negative performance that is far below even the S&P 500 index? You have to really question why the hell you’re not holding a simple double or triple long ETF of the S&P 500 or why you think you can outsmart a rigged market. Have a look at HSBC’s latest scorecard of hedge fund performance. Observe the performance of the individually legendary Tudor, Kovner, and Bacon:


It’s this sort of performance and environment that takes some of the fun out of the game. Intrinsically, trading is a competitive endeavor so there’s no giving up on the fight to earn profits against the world, but right now is not a time to be fighting if you’re not winning consistently. It’s a time for reflection on strategies, skillset, and the overall approach to your trading business.

The lack of any real movement in the markets could be a seasonal effect. It could be a product of the gross market manipulations. Or it could be that something worse may be on the horizon. By now the CNBC interview with Sam Zell has been shared and commented on by virtually everyone in the financial media and blogosphere. I won’t beat it to death here, but his comments are worth noting. He’s not some chump billionaire always looking for the limelight or setting up a book sale or political career. He’s the original “Grave Dancer” and he took Blackstone to school in the $39B sale of his company, Equity Office Properties Trust, at the top back in 2007. His words are worth heeding, but as with every other expert, not following blindly.

These are the key points he made on Squawk Box:

“The stock market is at an all-time, but economic activity is not at an all-time. People have no place else to put their money, and the stock market is getting more than its share. It’s very likely that something has to give here.”

“I don’t remember any time in my career where there have been as many wildcards floating out there that have the potential to be very significant and alter people’s thinking. If there’s a change in confidence or some international event that changes the dynamics, people could in effect take a different position with reference to the market.”

– “It’s almost every company that’s missed has missed on the revenue side, which is a reflection that there’s a demand issue. When you got a demand issue it’s hard to imagine the stock market at an all-time high.”

– “This is the first time I ever remember where having cash isn’t such a terrible thing, despite the fact that interest rates are as low as they are.”

So forgive my redundancy for reposting what’s already been reposted a million times, but the original link and interview can be found at:

Just to provide a little graphical support to the bullet points by Zell, take a gander at the following chart shared by professor Mark Perry of the Carpe Diem blog:


Meaningful or meaningless? You know the answer.

Coming back to underperforming professionals, it’s not just trader hedgies having a rough go. Even the plain old vanilla mutual fund managers in the large-cap space continue to also underperform a benchmark of the S&P 500. In a recent MoneyBeat column, David Kostin was quoted: “Only 23% of large-cap mutual fund managers have outperformed the S&P 500 this year, rivaling the worst performance in the past decade, according to the chief U.S. equity strategist at Goldman. By comparison, about 37% of fund managers have outperformed the benchmark since 2003. Only performances in 2006, 2010 and 2011 have been as bad or worse than the current year’s pace.”

In times like these where the US ZIRP and the Euro NIRP forces money into stocks, Siegel’s Stocks For the Long Run probably sounds better and better for many investors if they haven’t already shoved all their retirement funds into Vanguard’s warm embrace. I want to take a moment here to plug the research of Stansberry Research & Associates. Specifically, I want to call out the work of Porter Stansberry, Dr. Steve Sjuggerud, and Dan Ferris. If you are unfamiliar with their work then maybe it’s time you familiarized yourself with them, if you intend to be individually selecting stocks for your portfolio(s). I have been using their services for close to a decade. And in today’s market environment, they continue to be on the leading edge of most all of the macroeconomic happenings while also providing some of the highest quality deep research on equity selection out there. With a subscription to their advisories, I can honestly say you’d probably be getting the best bang for buck out there in the newsletter game. Having read plenty of samples of sell-side research from Wall St., these guys stack up and will assuredly enhance your ability to safely build a profitable equity portfolio.

Full disclosure, I have absolutely no relationship with Stansberry Research & Associates in any other capacity than as a satisfied subscriber. Like other services I have touted, I’m certain they don’t even know this blog exists. Additionally, that link to their site does not pay me some sort of commission. I truly just enjoy the quality of their products and wanted to take a moment to share that with my own readers. In my much younger days, I tried most every newsletter out there…Motley, everything under Agora, Richard Russell, amongst many others as I was learning the game and was simply too lazy at the time to open a book to teach myself just yet. For the last several years, these guys are the only equity research I rely on aside from my own. So I would recommend you visit their site and maybe try a subscription or two, I’m confident you won’t be sorry.

In the meantime, the markets are boring. No volatility; just summer flatness. Even the financial media and blogosphere are completely boring. No originality in content and certainly nothing new or profound being reported…and that includes I’ll keep posting my thoughts on various market observations but my next post I intend to share my thoughts on a different type of speculation, and that is sports betting specifically on college football. Having evaluated all the major sports, NCAA football is the one sport that consistently provides asymmetrical profit opportunities against any sportsbook whether it’s online or at a casino. Don’t get me wrong it ain’t easy, but if you do the research and have a quality understanding of the variables that go into some basic handicapping, then profits can be made.

Be safe and allocate intelligently because a rising tide does lift all boats. Just don’t take your eye off the ball for any reason while throwing money around willy-nilly…and I’m sorry for being gone so long. Life happens.