It's Like A Brick Wall

August 2, 2024

The market hates it when bonds are making outsized moves.

It's less about when rates are rising or when rates are falling.

The bigger point here is that when interest rates are making very aggressive directional moves, that's what brings the volatility to the stock market.

And that's exactly what's happening:

As you can see, rising bond prices and a rising Japanese yen hasn't necessarily been a bad thing for stocks.

In fact, one can argue that it's actually been a tailwind over the past couple of years, as we've entered into more of an inflationary regime.

It's the Rate of Change that has spooked the markets.

Here's brick wall #1 - which is the Japanese Nikkei Average finally getting back to those former bubble highs from 1989.

Say what you want about the market not having memory going back 35 years, but the market is literally proving to you that it does.

It took Japanese Stocks 35 years to get back here. And they're failing to get through:

Meanwhile (and maybe just a coincidence?) this is happening at a time that the Nasdaq100 is trying to get back above its March 2000 Dot Com Bubble Highs relative to the DJ Industrial Average - and it's failing.

As we discussed in yesterday's note, this action is also taking place when the Tech sector starting to lose strength vs the broad markets, also from the same place this happened in March 2000.

See: Tech Stocks doing Tech Bubble Things

Now, if you're going to see this Tech selling spill into other areas of the market, this chart below needs to be front and center.

High Beta stocks hit their lowest levels of the year this week relative to Low Volatility.

In healthy market environments, these lines are going up:

Also notice that Credit Spreads, as measured by the difference between the yields of Junk Bonds and US Treasury Bonds are at their highest levels in 6 months. (You can see this plotted by the new lows in the ratio between these two ETFs)

This is going to be a challenge for the broader markets.

It's also going to challenge investors who aren't used to sectors rotating as aggressively as they have in the past.

How soon we forget.

Meanwhile, here is Exxon Mobil, the bellwether of the Energy space going out this month at the highest levels in history: