On Thin Ice: Caveat Emptor

We reached the S&P 500 200 day moving average (DMA) this week, a pullback level I’ve been calling for since January. I started writing this newsletter in 2023, and during this time the market has primarily been in a bull market. Buying at the 200 DMA is generally a great practice during bull markets (bear markets like 2022, not so much).

I’ll get to the point, I have some economic signals I watch for crash risk, aside from using high judgement on the situation. As I shared yesterday, they are 10/10 high risk at the moment and they got worse today largely driven by higher oil, and lower copper and junk bond prices. Can probably also argue things got worse today due to the USD rallying more, which is known as the wrecking ball for asset values. As a result, there is a chance the stock market could decline significantly within the next 30 days. We essentially have all of the ingredients; offsides positioning (detailed here and here), a situation that is not easily controllable, and multiple high-risk situations occurring at the same time (AI over-investment, Middle East war, private credit risk). This is the first major risk event setup I have seen since 2020. 2022 was fairly predictable given the fed telegraphed what they were going to do and as the old saying goes “don’t fight the fed”. Also worth noting, the fed is not on the market’s side at the moment given the elevated risk of inflation. I never bet on a crash because by definition they are low probability events, but it’s good to know when you are skating on thin ice to prepare what to do if it breaks. Just a heads up that the risk is there. Good luck!

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