ARE WE HEADING FOR A STOCK MARKET CRASH? (Cont)
As noted in this post and Chart 1 above, the market is still locked step in mispricing both stagflation and recessionary conditions, rather the algorithmic systems trading off Federal Reserve news reports that future interest rate hikes won't be as severe, ala a 0.75% trigger. Which ironically the market rallied on the back of falling consumer sentiment as a relief rally that the Fed will only set a 0.50% rate increases. Chart 1, shows the two main indexes (Dow and S&P 500) on a 5 year chart trailing the NASDAQ which is nearing its 2021 support of 3988.
Chart 2 is slightly more technical, showing how the NASDAQ is still overpriced in compared to the 10yr bond yield, that usually trades inverse to each other, i.e 10yr up, NASDAQ down and vis versa. The vertical lines (white) intersecting with the reddish brown line horizontal shows two points, first corresponding point is the 15th March 2021 NASADQ at 10527 and the 10yr yield at 1.69%. The second is the 9th September 2019 with the NASDAQ at 8097 and the yield (at that date) was 1.69%.
Of course these dates and corresponding yield to index (NASDAQ) pricing was before and after yields on the 10yr went negative and the Federal Reserve pumped billions (Covid-19 response) into the Bond and Corporate financing markets, that in turn sent stocks rallying into what is known as the reflation trade.
The point is, if we are to measure the correlation of yields and growth stocks (NASDAQ), it would be evident that the market is mispricing the severity of inflation/rate increases and a recessionary economy. And now with speculation crashing such as Crypto and refinancing debt harder to achieve even with the Fed looking at edging in a cautious manner interest rates under 2%, that by definition is too low, considering that inflation may not have topped out if gas and electricity (energy) continue to climb, refer to this post; we maybe in for a larger sell off in the coming days or weeks.
That would be a crash.
Too bearish?
Trade with caution.
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