Wednesday's Market Minute: The Current Risk Radar

I’m excited to debut the Risk Radar, a new recurring segment on Market on Close that will give the most specific macro outlook I’ve offered to date. I’ll be ranking stocks, bonds, the dollar, and bitcoin in terms of their risk/reward to investors based on a stoplight system of green, red, and yellow. Green means go. Red means dangerous risk. I’ll try to adhere to the technicals as much as possible, injecting my own macro narrative only at times of extremely high conviction. Here’s how it stands today:

Stocks – Red. The simple fact is, the Nasdaq is in a downtrend after breaking to new lows last week. Big tech’s bear market leadership makes this the most important index to follow, and it’s extremely risky to own right now. Rallies have been selling opportunities since November, and for the most popular growth stocks, more than a year. It’s a vicious trend that must be respected. It was unwise to fight the Fed in an environment of increasing liquidity, and it’s equally unwise to fight against the tide when it's going out. To me, there is good logical and empirical evidence to suspect the rise in bankruptcies will continue and that most unprofitable stocks will continue to make new lows until they are bought or go bust. If the Nasdaq gets above June’s high range of around 12,700, that would be a meaningful higher-high on the chart, and the red light would turn yellow.

Bonds – Red. Same story here. Respect the trend. The 10-year yield made a new high after FOMC last week, and the Fed is most likely going to have to execute at least one more 75-basis point hike to show they’ve tried their hardest to slow inflation. Powell will likely have to close the gap with the market even more, which is expecting more tightening than the FOMC projected. The bond trend is arguably more tricky for traders than stocks, though, because of recession risk.

A recession would mean stocks continue lower, but bonds could rally and yields decline if the economy worsens to the point of instability. This is why investors should be very careful going forward to assume that lower yields will come with higher stocks. That’s the way it’s mostly been, but the relationship showed signs of fraying recently as bonds rallied on recession fears and stocks plunged. A move in the 10-year yield below 3.2% — the high from 2018 — would suggest this is happening and turn the light yellow for Treasuries.

Dollar – Green. Despite the swoon this month, the dollar still looks well-supported technically and fundamentally. Even if other central banks try to play catch-up, the Fed is and will remain in front as long as U.S. employment is sound. The dollar looks like it’s breaking out from a 7-year range, which is similar to its behavior during the dot-com bust. Greenspan was hiking rates, the bubble was popping, and the dollar ripped. Seems like an appropriate act to follow. If the dollar falls back to 101, its dominance may be on hold.

Bitcoin – Yellow. Everything tells me bitcoin should be much closer to $10,000 by now, but this weekend’s dip-buying was impressive. It sounds like it's a crypto last stand – with reports that FTX’s Bankman-Fried is acting as a bank of last resort – but the bullish price action must be respected nonetheless. Instead of breaking down lower, bitcoin is in a sort of descending triangle pattern. It shows declining bullish appetite, but support at a steady price: $20,000. Room for margin on both sides is miniscule. The moment bitcoin slips back below $20,000, the risk of a gap down to $12,000 is high. On the flipside, a rally above $23,000 would suggest the triangle is reversing higher instead, with a short-term target of $30,000.

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