March 6, 2020

Stocks – None

Macro – SPY, Bonds, Spreads

Reading The Market Premium Content from March 6

• The Spreads Causing Dislocation
• Stocks In Dangerous Spot
• Strong Jobs Data- Take It For What Its Worth – Morning Commentary
• Micron Update, More Call Buying

First off, I wanted to be open about this; I am strongly considering discontinuing the free morning commentary write-up. It takes a lot out of me in the morning and forces me to get up some bad hours. Add to that, that I have been staying up exceptionally late recently; and sleep has, well, been limited. Additionally, ad revenue doesn’t justify the expense it takes on me. So I think going forward, I am just going to cut this column down to one per day, only in the evening. I’m still thinking about this and I’m not sure. For the premium members that read these columns, I will figure out something to make sure you are not missing anything. I want to be open and honest because I genuinely am grateful for everyone that follows me and reads this everyday. So if you strongly object, let me know, and if I get enough people voicing their concerns, I will figure it out.

S&P 500 (SPY)

Volatility anyone? There is nothing to say at this point, other than the fact that volatility is here to stay for some time longer. The market is utterly confused, but balance will return to the “force” at some point.

We seem to learn a little bit more every day about this market that we didn’t know yesterday. At least I do. Today we learned the region around 2,900 does seem to be an area of support. Today marked the second time in a week that the market got down to these levels and managed to bounce.

For now, I placed an uptrend line on the bottom. Perhaps it is the start of something; perhaps it is not.

Here is some good news, I think. A lot of flux in the S&P 500 stems from the sudden collapse in the Treasury yields, and I think that giant rally in bonds is near or at exhaustion. The chart below shows the broadening wedge pattern in the 10-year rate.

But more interesting is that the spread between the US and German 10-year has collapsed, falling to around 1.45%. That is where a support level rest, taking the spread back to 2014, 15, and 16 levels. I think this may be one of the most important indicators an investor should be watching at that moment.

I truly believe that we are not seeing a flight to safety, but a flight to yields. When support on the spread collapsed around 1.95%, it triggered something that caused a massive rush into US Treasuries, and for the chaos to ensue. With investors opting to dump stocks and buy up Treasuries, may be due to their still postive yields. 

It wasn’t just this US/German spreads; it is the same for the US and British.

Not just in the 10’s either, it is in the 2-year bills as well. They all go back to one period in time, the levels between 2014 to 2016.

Samething with Japan 2’s.

Then, of course, you have the breakdown in spreads with the S&P 500. With the orange being the SPX, and blue the us10de10 spread.

So I tend to think that whichever way these spreads go will be the direction the stock market will go until these spreads stabilize.

Why is this happening? I’m not sure. But what is interesting is that spreads collapsed on February 20, which was that Thursday that the equity market had that mid-day plunge and bounced back.

And the rest seems to be history.

So by cutting rates, the Fed probably didn’t help this scenario at all. You can see spreads started stablizing, and then when Fed cut rates on March 3, the second leg lower started, creating even more dislocation.

Anyway, now you know what I’ll be watching. I explain a good portion of this in my a premium video today. The Spreads Causing Dislocation

Rest up. Monday will be interesting.

Mike