Rates Explode Higher On September 21 Tanking Stocks, But Now Its Time To Watch Spreads

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Stocks & ETF – $SMH, $BKX, $HYG $TLT

Macro – $SPX, #Rates #Fed

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Stocks were hammered today as rates increased following hotter-than-expected initial jobless claims and the Fed’s less-than-impressive performance on September 20. The 10-year rate rose seven bps to 4.48%, while the 30-year yield rose 11 bps to 4.56%. The 2/10s curve rose by 11 bps to -66 bps. Rates reached new cycle highs.

The problem, as I see it, is that despite rates on the Treasury curve rising rather dramatically, high-yield rates haven’t risen. Spreads between high-yield debt and Treasuries have contracted this whole time, and that appears to be ready to change. Once it does, it will be bad news for stocks because essentially, stocks have traded with the easing of these spreads and for the most financial conditions since May because, again, stocks saw 200 bps rate cuts coming, which, of course, was just a fantasy.

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High Yield (HYG)

For that, the easiest thing to watch may happen to be the HYG. The HYG is the Junk Bond ETF, and the more it falls, the more it indicates high yield rates rising.  It seems pretty clear that the HYG has dropped below the symmetrical triangle today, which could be a big deal. I have noted previously in my unusual options activity service that the HYG had recently seen bearish betting. 


The move in high-yield junk rates resulted in the CDX High Yield spread index moving up and, more importantly, breaking a pretty big downtrend. If that downtrend is broken and spreads start rising from here, it will bring serious pain to markets because as this rises, the VIX rises, and the stock market’s earnings yield rises. At least on the surface for today, it would appear that spreads broke a downtrend, which could mean that high yields are heading higher, and more importantly, serious pain for markets is yet to come.

S&P 500 (SPX)

Meanwhile, the S&P 500 closed right on support at 4,330, and a gap lower tomorrow would signal a break of the neckline of the Head and Shoulder pattern and probably a much bigger decline to come, probably back to that 4200 level I have focused on for some time. I guess it is worth pointing out that the JPM Collar put is at 4,210, and that could offer some support, which is only about 2.6% lower from here.

Russell 2000 (RUT)

The Russell 2000 has already broken its neckline, and there is not much stopping it at this point from revisiting its lows around 1,700.

20+ Year ETF (TLT)

Meanwhile, the TLT closed at a new 52-week low and surpassed its October low of $91.90. Rates probably aren’t finished going higher from here, but this will have to bounce at some point, too; it has been falling for weeks already.

Banks (BKX)

The Nasdaq bank ETF (BKX) is sitting on support at $79.50, and it would not be a good thing if that support level breaks because it probably means the Russell goes even lower, and it probably means the ETF drops to around $74.

Housing (HGX)

Meanwhile, the Housing index (HGX) finished the day lower by 2.7%, gapped below the support level at 522, and the next level of support comes at 505. The housing index is clearly not looking great, and this is something to watch because this can be a leading indicator for the rest of the market.

Semis (SMH)

Finally, the semiconductor ETF SMH broke below its neckline today, closing the gap at $140.50. Again not a great look for the sector or the market.

Don’t forget that the BOJ meeting tonight could have a big impact on rates globally, and the Yen


Charts used with the permission of Bloomberg Finance L.P. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment. 

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