Risk Neutral Market Gauges Ahead of Sunday Deadline

October 1, 2023

Mish's Daily

By Mish Schneider

We do not want to walk down the political aisle.

Nonetheless, what person can turn their heads away from the Sunday deadline on funding the government.

The aftermath of a shutdown will most likely include a credit downgrade for the US.

Do Americans need another reason to distrust the politicos?

With a 90% consensus that the funding will not pass, the bounce we saw in equities last week could be short-lived.

The Retail ETF XRT had a technically perfect mean reversion in momentum and a classic glass bottom reversal.

Coming into Friday, 3 of our risk gauges said risk neutral.

That gave us hope that our Granny Retail could lead us out of harm’s way.

And, on the heels of Nike earnings, she kinda did.

However, will a bounce in the consumer sector help keep the risk gauges neutral?

For that answer, we turn to another old reliable friend, high yield, high debt junk bonds.

These bonds are a key influencer for risk, after all, how bad can things be if companies with junk ratings are being bought for their higher paying yield?

That is a big risk on factor.

We also look at their performance relative to the long bonds (TLT).

Even though neutral can turn to risk off, any hope from bond traders and/or the retail sector could also see risk neutral turn to risk on.

We can hope, right?
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The chart of HYG has several fascinating and a somewhat taming influence on the extreme negativity.

For starters, HYG held its ground on Friday as the indices turned red. (So did XRT by the way).

Secondly, HYG returned over the July 6-month calendar range low (red horizontal line).

Thirdly, HYG held the March lows made after the mini banking crisis.

Fourth, HYG had a mean reversion buy in our Real Motion momentum indicator.

Fifth, and here is the risk gauge ratio, HYG is strongly outperforming the TLT (Leadership indicator).

That is what bulls need to continue to see.

Conversely, bulls do not want to see HYG fail the March lows.

Nor do they want to see XRT take out last week’s lows.

Furthermore, they do not want to see TLT catch a bid in fear of an oncoming recession while junk bonds underperform.

We like it when we can simplify the narrative.

Junk bonds help us to accomplish that.

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