MARKETS: Normal Correction? Or Much Worse…

From Greg M

At the end of 2021, I outlined how this year, 2022, would prove to be a volatile one for both the stock market, and the cryptocurrency space. Despite this, I have also said that I expect the stock market to finish 2022 higher. Gauging from the recent volatility in the market, and the fact that the SP500 topped out in early January, market sentiment has indeed turned bearish. If one were to step back and look at the global fundamental picture, its astonishing that the market has not fallen much harder. Today the SP500 is in a “technical correction,” that is it has fallen more that 10% from its all time high, but not more than 20%. If the SP500 were to fall beyond 20%, as the NASDAQ has, it would then be in a “technical bear market.”

The recent price action of the equity/stock market overall has been in response to the Federal Reserve raising the Federal Funds Rate, (FFR). This in turn has caused the benchmark rate, that is the 10yr yield, to “adjust” higher. It is also my belief that the Fed. Will continue to raise the FFR moving forward however, I believe that the Fed. Will be less aggressive than they are leading people to believe.

Looking again at the bigger picture, this stock market has gone virtually straight up for YEARS! Isn’t it time for some kind of corrective phase?

The answer to that question is ABSOLUTELY! In fact, the market is WAY overdue for one.

With that said, the probability that this market will finish the year higher remains real. The main reason why this market may today be “on sale” is this- the debt market remains stable. The rise in the benchmark 10yr yield as of late has been controlled, there is no sign of instability. Understanding that the debt market IS THE MAIN DRIVER of the stock market, it should make it easy to understand why, despite the recent market price action, new record highs for the market are possible and not too far off. While it is also possible that dynamics driving the market may change, it is vitally important to keep your portfolio hedged, that is simultaneously owning both risk-on, and risk-off assets. Risk-on refers to stocks/equities. Risk-off refers to commodities generally. Having a balanced portfolio with exposure to both risk-on, and risk-off assets at the same time sets you up for potential profits either way.

Eventually this stock market is going to PLUMMET, of that there is no doubt, and it will not be a slow burn over the course of months, but days. “The Big One” will not begin in the stock market itself, but in its main driver, the debt market. By observing the price action of the 10year yield, we can see if the debt market is becoming unstable- we are watching for an uncontrolled sell-off in the debt market which will cause the 10year yield to spike very rapidly. This will in turn put enormous pressure on the stock market.

With an uncontrolled sell-off in the debt market, with rates spiking rapidly, there is a potential for the SP500 to fall 80%. The truth is, no one knows where the bottom really is, but we know where to look for signs that The Big One is in fact starting.