Spooky Yields Spook Wall Street

Written by Dennis Slothower
Posted October 5, 2018 at 8:00PM

On Thursday, we saw further government, corporate, and junk bond selling sending yields sharply higher.

The five-year Treasury bond yield is now above 3% for the first time in 10 years, which is really spooking the market.

The bond market rout got the attention of the stock market, especially in the risk stocks, sending the Nasdaq Composite and Russell 2000 small-cap stocks down sharply in broad-based selling on Thursday.

There really are a number of factors weighing on the market now; a lot of uncertainties. As I have forewarned, we’ve seen a peak in earnings in the first and second quarters and now we are seeing more and more corporations guiding their earnings announcements down!

Notice, this isn’t just a mild turndown in guidance but a sharp reversal in lower guidance going back to 2010! This is clearly making investors nervous as we approach the earning season, as any deceleration in peak earnings now makes stocks excessively overvalued going into the midterm elections.

Heightened Banking Risk

It is also worrying how unstable the global markets have become, which has led the International Monetary Fund (IMF) to warn that the world economy is at risk of another financial meltdown. This is following the failure of governments and regulators to check global debt levels far above those at the time of the last crash of 2008 in the unregulated areas of the financial system, such as the shadow banks in China that are very vulnerable.

The IMF is also concerned about the failure to impose tough restrictions on the insurance companies and asset managers that handle trillions of dollars of funds, as they are exposing portfolios to junk bonds for higher yields.

I alerted investors about these risks and others long ago, but the month of October is bringing together a number of risks that are compressing now.

Also unsettling, according to Bloomberg, JP Morgan cut its forecast on China’s stocks from “overweight to neutral” on risks of a full-blown trade war with the U.S. These analysts at JP Morgan are really quick to spot things, aren’t they? After the MSCI China Index is down 24% from its peaks in January!

The truth is a full-blown trade war with China is greatly worrying the Fed. Fed governor Hawker said on Thursday he worries about emerging markets and inflation accelerating faster. In other words, the Fed believes it is way behind the inflation/neutral curve. More Fed governors came out on Thursday with their approval for higher interest rates.

We have to be very careful of October going into the midterm elections as surprises that can be very unsettling to the stock market are often sprung by both political spectrums.

It is clear that investors are unloading their more volatile stocks, as new lows in the New York Stock Exchange (NYSE) are now outpacing new highs going into October. This is another danger sign, along with a host of other signs we seem to have been accumulating recently.

The Nasdaq Composite new lows are also outpacing new highs, which reveals underlying market breadth weakness developing.

We’ve been getting all kinds of Hindenburg Omen cluster sell signals as well, but investors need to realize there is a huge amount of sell distribution occurring, with capital flowing in a defensive maneuver into blue chips.

When the Dow is making a new high but most issues of the NYSE are beginning to trend lower into a bear market, we have a serious warning, as clearly seen in the McClellan Summation Index for the NYSE index:

As forecasted regarding third quarter slowing, FactSet is now receiving the highest percentage of S&P 500 companies issuing negative EPS guidance for a quarter since Q1 2016.

The stock market is priced for maximum perfection and unless we see another blowout quarter like the second quarter, stocks will be very vulnerable to any deceleration of growth in earnings going into the midterm elections.

This isn’t to say the market can’t rally on this Friday’s jobs report, but big money is covertly preparing for a deceleration in the growth slope.

On Wednesday, based on private payrolls and American services industries that underscore the economy’s jobs demand, the U.S. Treasury 30-year bonds plunged, sending yields sharply higher. This makes Treasury bond yields extremely competitive to the stock market!

This also caused Fed Chairman Jerome Powell to stress that higher interest rates are needed!

To your wealth,

Dennis Slothower Signature

Dennis Slothower
Editor, Stealth Stocks Daily Alert and Wall Street's Underground Profits

Dennis Slothower has been leading a small but profitable group of investors to some extraordinary profits in both good markets and bad over the course of a 38+ year investment career, starting as a stock broker in 1979. In 2011 Dennis was named the top performer by Hulbert Financial Digest for avoiding the Crash of 2008. Now, he is bringing his extensive experience to the public through Outsider Club, Stealth Stocks Daily Alert, and Wall Street's Underground Profits. For more about Dennis, check out his editor page.

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