The Stock Market May Be In Trouble: A Very Ominous Signal

I believe that the junk bond market is starting to price in the deteriorating economic fundamentals and has begun a price correction to reflect the expectations of higher credit risk for companies which require cash flow growth to service their debt. It is my view that the stock market will soon “catch up” to the junk bond market in a big sell-off that will be triggered soon by something – perhaps even a bad employment report this Friday  – Dave in Denver

The Seeking Alpha article from which that quote is derived was actually written by me on Monday night and published yesterday mid-day by SA.  So my call that the stock market could incur a significant sell-off should be measured based on Monday’s close of 1640 on the S&P 500 (SPX) and 15,254 on the Dow.  As I write this, the SPX is trading at 1612 (-1.7% from Monday) and the Dow at 14,991 (also -1.7% from Monday).

The reason I believe the stock market is vulnerable to a big sell-off here has to do with a signal that is being emitted by the junk bond market.  I lay out my entire case in this article:  Ominous Signals  As you will see, I discuss the sell-off going on in the junk bond market and what it could imply for the stock market.

On another note, I’ve been seeing the decibel level in the media being turned up loudly about the rising the probability that the Fed could “taper” QE.  What amazes me about this nonsense is that before QE2 and QE3, the same chorus of Fed heads and writers/bloggers were promoting the same crap – about three or four months prior to the Fed actually pulling the trigger on even more QE.  I recall specifically that Phoenix Capital and Bill King of the King Report were adamant that QE2 was the last of the printing.  They should be eating a lot of humble pie for their intransigent insistence that QE would stop at QE2 but King is now certain that tapering is imminent.  Amazing how tragically ephemeral most people’s memories seem to be.

The fact of the matter is that 1) the economy is going into a tail-spin, especially the housing market (more on that soon with hard data as evidence) and 2) QE was never intended to prop up the economy.  Huh?  Ya, that’s right.  QE is 75% about keeping the banking system from collapsing and 25% about keeping the Government funded at low interest rates.   If you look at the change in the Fed balance sheet since QE began, it has gone up so far by about $2.4 trillion.  Well guess what, and not coincidentally?  The Excess Reserve Account at the Fed of the Too Big To Fail banks has gone up in the same time period by $1.8 trillion.  Wow.  That math works – that’s 75% of the QE.  The rest of the QE has funded the Government and the housing market.

My point here is that QE is not going to “taper,” although the Fed will jawbone and tap dance as if they are going to taper until it becomes obvious to everyone that they’re going to have to increase QE.  IF for some reason the Fed were to “taper,” it will make my prediction of a huge stock market decline look even more prescient.