Hedge Fund Blogs From HedgeCo.Net


Stalking the Bear Part 5: The Final Installment

No need to stalk anymore, the Grizzly is now in plain sight and gorging itself on hapless bulls.  I started the ‘Stalking’ series on March 30th with the intention of raising the awareness of readers to the dangers lurking in the financial forest. From the April highs to the recent May low, the S&P500 dropped 14.6%, NASD Comp. 15.6% and the Dow 13.2%.  I trust you used the knowledge imparted to protect and profit during the month of May.

For a picture of what a grizzly looks like please see the chart below. I emphasized the importance of the NYSE Composite in Part 4 of this series. We believe the NYSE Comp. experiences less interference (manipulation) from futures and ETF derivatives than does the big three (DOW, S&P500, NASD Comp), hence offering better insight into true direction. True to form, the NYSE Comp. (depicted below/each bar = 60 minutes) led on the downside dropping 16.2% and remains weaker than the big three trading firmly below the 200-day moving average…. 

nyse1

The debate now rages about whether this selloff is simply a correction in a Bull market or the return of the Bear. I have made my opinion abundantly clear over the last 2 months. However, I will offer up the following two charts as an exclamation point.

Both charts focus our attention on the credit markets. For some time now, credit markets have been leading equity. I dedicated Part1 of the ‘Stalking’ series to this basic credit leads equity theory. To place a finer point on it, if credit markets are relatively stable then equity selloffs can be viewed as merely necessary pullbacks in ongoing Bull markets. However, if credit market volatility explodes, CDS spreads widen dramatically, interbank lending rates skyrocket, etc., then something more sinister is afoot. And no doubt that foot is covered in fur and has claws.  

So, what is credit telling us now? Well, on May 24th our favorite credit Guru, Michael Johnson of M.S. Howells, had this to say, “CDS spreads are today as bad as they were in Sept. ‘08.” That’s certainly not a good sign. How about the interbank lending market? LIBOR rates in ‘08 spike higher offering an early warning sign of big trouble to come. The chart of today’s LIBOR rate (shown below) offers a classic example of the proverbial picture that is worth…

libor

In conclusion, I am posting a chart of  high yield bond spreads. This chart is indicative of the destruction occurring across the spectrum of corporate and sovereign credit…

hy

Bottomline: Rates are rising at an aggressive pace and unless or until this trend dissipates equity will have a hard time sustaining a rally. Expect volatility to remain elevated. Remember, the biggest up days on record occurred during Bear markets. Please don’t allow the cheerleaders in the financial media to confuse you on these up days. Instead, view them as you would the little guy in the Lotto commercials. He grabs the microphone and screams about the possibilities. Do you really want to be the type that runs with the mob to buy a ticket?

About Bret Rosenthal

Interpreting the news that moves markets. Principal of RCM, LLC, and founding partner of the Fortune's Favor Family of Funds
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