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Stress In The Corporate Bond Market Has Appeared This Week – Mike Swanson (03/12/2020)

On Monday the potential double bottom pattern that had formed in the stock market failed, but on Tuesday the market had a wonderful rally that helped us think maybe things could be ok for awhile. Then the stock market gave up all of the gains it made on Tuesday and then some.

It is getting ugly and the prudent thing to do is limit risk.

No one in the financial media will ever tell you to sell and very few financial advisers, stock brokers, or newsletter writers will tell you to do so either. It’s not because they are liars, but because if they say it the crowd will completely destroy them. A TV talking head who says sell will be taken off the air and a money manager will just lose his customers who are actually paying them to play the market or invest in the long-run and never get out. If the adviser sells them for good reasons and the market goes up then they will lose their job. But if the market keeps falling they can blame it on surprises – and the virus makes for just such a surprise.

But in the end it is market trends that rule.

The reality is cash reserves and gold are now life preservers for financial accounts while trying to guess bottoms now is too early, because it is fool’s gold to do so in a market broken down this quickly this far away from its 200-day moving average. This fact IS ONE of the two causes of the manic stock market volatility.

The stock market is basically trading so far like gold stocks did in the past when they began bear markets. I talked about this in a video I posted Tuesday you can watch here in case you missed it:


We are all watching the stock market moves, but in reality there are actually more important things now happening outside of the stock market gyrations.

Perhaps the most important thing for not just the stock market, but the US economy is the corporate bond market. And this week the most widely traded high-grade corporate bond ETF the iShares IBoxx $ Invest Grade Corp Bond Fund (NYESARCA: LQD) dumped and broke down.

LQD didn’t top at the same moment the stock market did and was doing more than fine last week as money surged to get into bonds across the board.

But now US corporate bonds are diverging away from Treasury bonds and now trending down.

Eleven years ago in March of 2009 the S&P 500 made a bear market bottom at 666. Last week on Friday the 10-year Treasury bond put in a low at 0.666. On that low corporate bonds made their peak.

Go away devil!

But God doesn’t care about the stock market.

There is more to the universe than today’s stock market move – something to keep in mind today.

But as a result of the drop in bonds stock buybacks are now turning off.

And companies with the most debt are going to experience pressure on their balance sheet if this continues.

And this drop in the corporate bond market is the SECOND cause of the current stock market volatility.

In reality low interest rates brought with it an epic bull run – and now top – in the corporate bond market. I thought LQD would tip over a few months from now, but things are happening faster than I thought.

Everyone is going to keep paying attention to the stock market moves, but this beginning bear market in corporate bonds is what is going to drive the stories the general public focuses on when it comes to the economy and financial markets over the next few years.

It ultimately is going to be part of the cause why gold is going to soar. Gold in fact is still up year to date, however gold mining stocks this week have taken a hit. It has to do with this move in the bond market, although most of the big mining stocks have good balance sheets with low debt unlike their situation in 2011 or 2008.