Tuesday, November 23, 2021

Morning Note: Junk Bonds Rumbling -- And -- A Telling Quote

As clients and long-time readers know, we do a great deal of deep ongoing analyses in our effort to ensure that our client portfolios reflect what we believe, in the aggregate, is the best overall risk/reward setup. That process -- which includes both fundamental and technical analysis across asset classes, sectors, regions, politics, geopolitics, etc. -- over the years has led us to creating proprietary indicators in areas such as the macro economy, financial stress and investor sentiment. 

We're presently constructing what we'll call our equity market conditions index. We've settled into a dozen data points (for the moment [always subject to change]) that our experience has us believing capture, in the aggregate, the general state of overall equity market conditions.

We're talking the dollar, interest rates, monetary policy, fiscal policy, valuations, credit market conditions and so on.

While we have yet to formalize, and thoroughly back test, this new barometer, we have been scoring it for the past few months. It's presently scoring -16.67 (on a -100 to +100 scale).

So, according to our nascent indicator, overall stock market conditions are presently slightly net negative.

One area that jumps out, that, in a sense, comes as a surprise (although perhaps it shouldn't) shows up in our assessment of credit market conditions: It's the recent performance of HYG, the largest junk bond ETF (now negative on the year).

So why the surprise? Well, in my humble view the Fed jumping directly into the corporate bond market (both individual securities as well as the likes of HYG) last March largely explains what "saved" stocks from what would've otherwise been one of history's great bear markets. Interesting that the market would today bid some lower-rated paper to a 7% yield, as if the Fed wouldn't indeed come to the rescue should the proverbial ice once again break -- that (the Fed not coming to the rescue) is a low-probability bet in my view.

As for the above daily HYG chart, actually, it's looking potentially bullish right here; with a downward-sloping wedge forming against positive divergences in the momentum indicators... Hmm...

Asian equities were mixed overnight, with 8 of the 16 markets we track closing higher.

Europe continues to suffer this morning, with all but two of the 19 bourses we follow in the red, as I type.

US major averages are mixed (mostly lower): Dow up 6 points (0.02%), SP500 down 0.14%, SP500 Equal Weight up 0.24%, Nasdaq 100 down 0.61%, Nasdaq Comp down 0.55%, Russell 2000 up 0.03%.

The VIX (flagging caution of late) sits at 19.67, up 2.14%.

Oil futures (stubbornly bucking political pressure) are up 1.34%, gold's down 1.04%, silver's down a big 3.00%, copper futures are up 0.83% and the ag complex is up 0.15%.

The 10-year treasury is down (yield up) and the dollar is flat (down 0.01%).

Led by uranium miners, energy stocks, MP (rare earth miner), metals miners and Indian equities -- but dragged by silver, AMD, Viacom/CBS, solar stocks, ALB (lithium miner) and gold -- our core portfolio is up 0.05% to start the session.

For this morning's quote I'm going to copy and paste yesterday's, just in case you missed it. It's very telling!!   emphasis mine...
The following comes from a book aimed at traders, ah, but make no mistake, it applies equally to investors:
"The biggest challenge in trading is not choosing what asset class to trade, or when to buy and sell, or what percentage of your capital to risk on each trade. The biggest challenge in trading is to manage your self. You are a bundle of emotions, memories, history, knowledge, and bias. You can be smart and do stupid things. You can make a hard job impossible by making irrational and compulsive decisions."
--Donnelly, Brent. Alpha Trader: The Mindset, Methodology and Mathematics of Professional Trading

Have a great day!


No comments:

Post a Comment