Be ware of the TINA trade (interest rate) trade deterioration (there could be an alternative)

 

The stock market move higher on Friday only to finished mixed after Grandma Treasury Secretary Yellen said a large Covid-19 relief package is needed for a full recovery Yellen told CNBC Thursday after the closing bell that more *bailout* stimulus is necessary even as some economic data suggested a rebound is already underway. She added a $1.9 trillion stimulus deal could help the U.S. get back to full employment within a year [what types on medication was she popping]. She stated that “We think it’s especially important to have a big package [that] addresses the pain this pandemic has caused as 15 million Americans behind on their rent {in my opinion this should not have happened as many are willfully behind as they used bailout monies for other purposes}. “I think the price of doing too little is much higher than the price of doing something big. We think that the benefits will far outweigh the costs in the longer run,” she stated.

This week could be all about interest rates (several of my primary indicator “2 out of 13” that I use to facilitated my trading signals) as if we continue to see interest rate rise there is a quickly forming negative risk-contagion of a serious stock market correction if rates continue to sharply rise resulting in a dramatic and quick fundamental valuation reset and many portfolios would be prime candidates for a negative valuation reset... for the first time since June we are seeing that the 10-year yields are suddenly moving higher. One of my other primary indicators that I have used over the last 30 years is that when the SPX-500's P/E ratio tends to peak out in the 22 to 25 times range of forward earnings. Far too many knuckleheaded analheads and portfolio managers and quantitative researchers are looking at normalized nominal GDP growth in the 4.0% to 5.0% range (a massively inflated number), which is where longer-term interest rates should be normalized. However, I believe that normalized GDP growth is probably closer to 2.0%.

You should all contemplate what will happen to your holding if the looming fundamental and valuation reset; I see coming appears, I am guessing that there will be massive FEAR in the near-term. As we have already started to see that real interest rates have stated to move higher on the spike in commodity prices, and we could see some massive concerns about multiple resets for those TFAANG+M type of high-flying growth stocks that seem to be one directional due to short squeezes and being hard-to-borrow the problem many funds face in my opinion is that they have way too much concentration risk in rate-sensitive technology stocks. 

I previously stated in last week’s weekend-market-report that with the indexes/market already trading over 2-standard deviations above their 50dma’s I believed then that further upside was likely to be muted and extremely limited. Such was the case as this past week as the indexes/markets struggled all week during a normal bullish option-X week to hold gains as they traded in a very narrow range in a light volume environment volume environment. Given the extreme overbought and bullish conditions, there is a risk of an incredibly significant correction over the next few days/weeks. My proprietary indicators “that I have been honing for over 25-years” unfortunately do not yet distinguish between a 5.0% to 8.0% correction and or a more nasty 15.0% to a 20.0% sell-off; and history has shown us for the past decade that it doesn’t take long for robotic Pavlov’s trading dogs... so called “trading-bots” to buy the proverbial dips in anticipation of another wave of massive FED manipulation and intervention or soothing words about the Covid-19 vaccines...or another massive new stimulus bailout...this has been the conventional trend play since 03/2019; the bots buying all dips, as the FED throws in massive liquidity to support the markets and enrich their masters!   Remember my friends that these corrections in this one directional manipulated 12+ year bullish cycle often occur so quickly you do not have much time to decide how you want to respond!  I believe that the market has been struggling as of late due to the rise in interest rates.

 

As we touched on last week, investors may be starting to factor in the massive threats of significant real-life higher inflation and a rise in interest rates. With an economy pushing $84 trillion in debt [$157 trillion in underfunded liabilities and debt] the entire premise of “the consumer consumption function” as well as loony “valuation matrix justifications” for the equity markets, is based almost solely on historically low-interest rates and massive free flowing “bailout” stimulus (also massive FED Q/E). However, that is rapidly ending as the rise in rates is now approaching the proverbial “danger-danger Wil Robinson zone” for the markets interest rates are rapidly approaching the 1.5% to 2.0% over-head max barrier, where higher payments will collide with disposable income. Historically, such has not ended well for markets. 

 As I have previously written about extensively the rise in interest rates this year is much more problematic than most suspect. Higher interest payments on massive corporate loans taken out to exploit earnings as they were used to buy-back stock reduces real capital expenditures threatens needed refinancing and spreads through the economy like a nasty cancer; with focus on inflation fears and the likely subsequent FED tightening rising real yields that might prove to be the ultimate “noose” tightening around the neck for this risk rally. Higher real interest rates also quickly undermines one of the critical “bullish support legs” of this crazy rally these past 12-years in a massively over-indebted economy, as increases in interest rates are extremely challenging for these bullishly giddy markets whose valuation premise(s) rely on these historically low manipulated interest rates. 

We have seen in the past that each time interest rates have spiked; it has generally preceded a moderate to a significant market correction. When combined with higher inflationary pressures due to stimulus injections, such a situation becomes quite problematic. Higher borrowing costs and inflation compresses corporate profit margins and reduces real consumption as wages have for over 40+ years fail to increase commensurately. While the various Fed-heads and their fearless leader “Superman-Powell” continues to suggest through their reiterations that they will let “inflation run hot” for a while, the problem is that the real economy will not allow them such a privilege in my opinion. As the negative impacts of higher payments and costs (due to higher rates) will likely derail overspending very quickly, given the real economy is still massively and I mean massively overly dependent on FED and fiscal “life support.”