Financial markets are far from calm – indicators indicate a worsening situation.
The index of high yield bonds continued to fall and moreover broke through the 50-day moving average. Therefore, nervousness in financial markets may increase in the coming days.
High Yield Bond Index
This is confirmed by the Index of Financial Conditions, which is getting worse. It, by the way, like the High Yield Bond Index, also broke through the 50-day moving average.
Financial Conditions Index
Source: Goldman Sachs
All of this previously usually anticipated a deepening correction.
Spreads between “junk” and US government bonds also began to increase – a kind of negative signal, too.
Now let’s pay attention to the sentiment, or rather, the difference in the share of bulls and bears in the US stock market. It has reached a critical level of 20 percentage points. In 2018 and 2019. this was a signal for a trend breakdown and an early reversal. But this year this indicator works worse – almost all the growth from April to September took place with a predominance of “bearish” sentiments.
The difference between bulls and bears in the US stock market (p.p.)
Perhaps this indicates that the long-term “bullish” trend has begun to change to a downtrend.
Now let’s see what is there with dollar liquidity, and everything is fine with it – the world central banks return the previously taken dollars to the Fed. Against this background, the volume of open swap lines fell to $ 32 billion, which is a multi-month low.
Amount of active swap lines (USD bln.
Another interesting indicator: the ratio of the capitalization of the US stock market to the monetary base M2. He’s not growing!
The ratio of the capitalization of the US stock market to M2
On the one hand, this suggests that the April-August growth is confirmed by money and the markets still have great upside potential – they often began to fall after the ratio exceeded 2x. On the other hand, this may indicate a drop in the efficiency of the printing press, that is, in order to raise assets up, even more money is needed and this is not enough.
Based on the indicators, it seems to us that today the likelihood of a further fall in the coming days is higher than the probability of growth. The markets, in turn, will begin to recover after a noticeable correction either after the launch of the “printing press” by the FRS, or after new monetary stimuli from the US Treasury. Recall that almost 1.7 trillion dollars have been accumulated on his accounts.
In general, be careful in buying the bottom, the situation is nervous.
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