Be Warned: The Bears Are Finally in Control of the Stock Market
Gold, utility stocks, Treasurys and the U.S. dollar could be worth a look here
Source: shutterstock.com/IKagadiy
Today’s market feels very different.
I’ve been highlighting repeatedly that conditions have been worsening. Utility stocks, both a leading indicator of stock market volatility and way to play it, have been outperforming since March. Lumber prices have completely collapsed relative to gold prices. The drop in lumber clearly warned about housing starts, which tumbled by 14.7%. We suddenly find ourselves in what could be a substantial change to housing market activity and demand as a result. This, combined with gold’s stunning move higher, all dropped the breadcrumbs for bears to follow.
The problem with corrections of course is that for most market participants, you don’t realize you’re in one until it’s too late.
We Are Likely in a Stock Market Correction
I think we are in the early stages of one right now, and I’ve believed that for the past month. One thing that confirms this is the way small-cap stocks are acting here. Despite repeated claims that small-cap stocks would lead the next wave of the bull market higher, the small-to-large ratio is back to 24-year lows. In other words, it’s a bull market for large-cap stocks only. The majority of stocks are getting left behind.
I think this goes beyond concerns around the yen. I think it also goes beyond concerns over an escalation of war between Israel and Iran. I think investors are totally forgetting that there is a debt refinancing tsunami coming in corporate bonds.
Remember that a lot of companies locked in low rates after Covid-19. Many of those bonds mature this year and next. The issue is that these bonds will roll over into considerably higher rates than most companies have had to navigate for years, and it remains unclear how many can survive. This explains why small-cap companies have been languishing. There are legitimate concerns around bankruptcies rising the longer that higher rates hold. This is true no matter how strong the U.S. economy appears to be.
How to Play the Correction… And When It Will End
How and when does it end? I tend to think about corrections, and crashes, more in terms of time. A stock market crash is just a faster stock market correction. If the decline in markets is orderly and gradual, as so far it seems to be, there’s more time to deal with risk and re-allocate, by going into gold, the dollar, utility stocks or Treasurys. If the move is sudden, then it would create a dislocation that means you likely already took the hit in your risk-on assets, in which case it might make sense to buy into the pain.
How it plays out is anybody’s guess, but the weight of the evidence does suggest we are in a risk-off phase now. The question is if it plays out like a repeat of 2022 where stocks and bonds fall together. I certainly hope not.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.