Lets Review the Market Carnage — Has The Cycle Turned? SpontaneousDisorder Follow Mar 7 · 4 min read

Posted on Reddit

On December 26th I posted “Closing in on the greatest crash in history” which showed the stock market was making a historic top. Since then the S&P made its fastest correction in history and US treasury yields have crashed across the board.

This decline was very unusual in its speed and breadth so soon after an all time high. If this sort of selling pressure and panic into bonds is occurring so soon after the peak can you imagine what the epicenter of the crisis will look like?

As short term yields crashed it forced the Fed to make and emergency rate cut — the first since the financial crisis. They will soon need to cut again as less than a week later 3 month yields are half a percent less than Fed funds already.

Short term yields plunging and the yield curve uninverting is the most reliable indicator of impending recession. Here we can see the 3month/10year has uninverted again (blue line rising above zero).

This chart shows the entire yield curve plunging. As you can see the entire curve has uninverted. It is still quite flat and if the curve steepens that will send a louder recession warning.

Will that happen soon? Well T-Bond bullish sentiment (daily sentiment index) has reached an EXTREME 98%. Its likely a bottom in longer term yields is being made here. Those long term yields could rise back up steepening the curve. (Short term yields could fall further also.)

This chart shows corporate bond yield spreads over treasuries. So it shows how much investors want to be compensated for taking extra risk. Yield spreads have jumped over the past couple of weeks and new issuance of corporate bonds even halted for a week. This has a long way to go yet!

The Stock Market

The stock market shows indications of being oversold in line with a deep correction. Its more likely the markets need to calm down before the next big panic wave lower.

For example the daily sentiment index for the S&P is at 8% which is very low. The fear and greed index is at just 6. The opposite extremes to just weeks ago!

Volatility has exploded to the highest since the financial crisis

The put/call ratio is showing fear after that historic period of call buying activity which I’ve previously used to indicate a big top.

Although these indicators point to lower immediate downside risk here one indicator does not show a healthy market.

Market breadth does not look good and this indicator has been plunging in recent days. This breadth indicator tends to lead prices so its a sign there is more downside ahead.

(S&P equal weight/S&P 500 — the green line will fall when larger cap stocks make up a larger proportion of the index)

Another thing to look out for — problems in repo are flaring up again. Zoltan Pozsar thinks this is about to get worse. [Long PDF warning]

Liquidity will be a central feature of the coming crisis as well as the corporate bond market. The problems in repo are the initial flare ups in this coming liquidity crisis.

If you want to see some of the charts in this post or articles explaining yield curves and repo check out the /r/economiccollapse wiki.