Corporate Bonds: "The Next Shoe to Drop"

"The neckline has been broken over the last few days"

By Elliott Wave International

A "calamity" is likely ahead for corporate bonds, says our head of global research, Murray Gunn.

Some of Murray's analysis involves the head and shoulders, a classic technical chart pattern. In case you're unfamiliar with it, here's an illustration along with an explanation from one of our past publications:

A head-and-shoulders is a reversal pattern that consists of three price extremes. Market technicians refer to [them] as the left shoulder, head, and right shoulder. ...it takes a break of the neckline to confirm a reversal... [and it's] not just a bearish reversal formation. Inverted head-and-shoulders mark bottoms.

With that in mind, here's a chart and commentary which Murray provided for the April Global Market Perspective, a monthly Elliott Wave International publication which covers 50-plus financial markets:

The chart ... shows the relative performance of corporate bonds, as proxied by the iShares iBoxx $ Investment Grade Corporate Bond ETF (ticker LQD) versus the iShares 7-10 Year Treasury Bond ETF (ticker IEF). A distinct Head and Shoulders pattern exists where the neckline has been broken over the last few days. The corporate bond market has held in reasonably well over the last year, but we fully expect this sector to be the next shoe to drop.

Don't count on the ratings services to provide timely warnings. In the past, downgraded ratings have sometimes come only after most if not all the damage was done.

Remember Enron? The company still had an "investment grade" rating just four days before it collapsed. Ratings services also missed the 1995 debacle at Barings Bank. Olympia and York of Canada is another historical example: the largest real estate developer in the world at the time had a AA rating on its debt in 1991. Less than a year later, it went bankrupt.

Getting back to the present, Murray Gunn also notes:

When ... corporate loans are re-set this year, there are going to be a few deep breaths being taken, and more than a fair share of tightened sphincters!

And, speaking of chart patterns of financial markets, another way to monitor the bond market is to use Elliott wave analysis.

If you'd like to delve into the details of this method of analysis, read Frost & Prechter's Wall Street classic, Elliott Wave Principle: Key to Market Behavior. Here's a quote from the book:

If indeed markets are patterned, and if those patterns have a recognizable geometry, then regardless of the variations allowed, certain price and time relationships are likely to recur. In fact, experience shows that they do.

It is our practice to try to determine in advance where the next move will likely take the market. One advantage of setting a target is that it gives a sort of backdrop against which to monitor the market's actual path. This way, you are alerted quickly when something is wrong and can shift your interpretation to a more appropriate one if the market does not do what you expect. The second advantage of choosing a target well in advance is that it prepares you psychologically for buying when others are selling out in despair, and selling when others are buying confidently in a euphoric environment.

If you'd like to read the entire online version of Elliott Wave Principle: Key to Market Behavior, you may do so for free once you become a member of Club EWI, the world's largest Elliott wave educational community. A Club EWI membership is also free.

Join now by following this link: Elliott Wave Principle: Key to Market Behavior -- get free and instant access.

This article was syndicated by Elliott Wave International and was originally published under the headline Corporate Bonds: "The Next Shoe to Drop". EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Financial Advisors Take Heat for Market Losses (Will Anger Intensify?)

Was 2022 an aberration for the 60/40 allocation?

By Elliott Wave International

Many financial advisors steer clients who are willing to take some risk toward a 60% stocks / 40% bonds portfolio.

Alas, investors who followed that strategy in 2022 saw the value of their portfolios decrease substantially.

In November, The Elliott Wave Theorist, a monthly publication which provides analysis of major financial and cultural trends, said:

Our long term bearish stance on stocks and bonds for 2022 is certainly panning out. In mid-October, [this] headline and chart, from Bank of America, made the rounds in the media:

The bond market was a big contributor to investors' losses. The September 2020 issue of EWT depicted a 78-year cycle in 10-year U.S. Treasury note yields and concluded that after 39 years of rise and 39 years of fall, interest rates had just registered a historic bottom.

Since then, as you know, interest rates have risen substantially, which means bond prices have fallen.

Even today, many clients of financial advisors are still fuming (Marketwatch, April 4):

Investors are mad as hell at advisers ...
With the S&P 500 down 18% in 2022 and bonds off, too, investor sentiment toward full-service investment firms dropped significantly from last year

Yet, there are some who suggest the 60/40 allocation is still worth considering, along with perhaps a few tweaks (Forbes, March 9):

The 60/40 Portfolio Is Not Dead; It's Just Not Well-Balanced

As I write, the 60/40 strategy has performed better so far in 2023, but the remainder of the year is another matter.

Elliott wave analysis can be useful in helping you get a handle on what the remainder of 2023 holds for stocks and bonds.

If you'd like to learn how the Elliott wave method can help you analyze financial markets, read Frost & Prechter's Wall Street best seller, Elliott Wave Principle: Key to Market Behavior. Here's a quote from the book:

In markets, progress ultimately takes the form of five waves of a specific structure. Three of these waves, which are labeled 1, 3 and 5, actually effect the directional movement. They are separated by two countertrend interruptions, which are labeled 2 and 4. The two interruptions are apparently a requisite for overall directional movement to occur.

[R.N.] Elliott noted three consistent aspects of the five-wave form. They are: Wave 2 never moves beyond the start of wave 1; wave 3 is never the shortest wave; wave 4 never enters the price territory of wave 1.

... Elliott did not specifically say that there is only one overriding form, the "five-wave" pattern, but that is undeniably the case. At any time, the market may be identified as being somewhere in the basic five-wave pattern at the largest degree of trend. Because the five-wave pattern is the overriding form of market progress, all other patterns are subsumed by it.

Here's some good news: You can read the entire online version of Elliott Wave Principle: Key to Market Behavior for free once you become a member of Club EWI, the world's largest Elliott wave educational community (approximately 500,000 worldwide members).

A Club EWI membership is also free and allows for complimentary access to a wealth of Elliott wave resources (videos and articles) on investing and trading.

Join Club EWI now by following this link: Elliott Wave Principle: Key to Market Behavior.

This article was syndicated by Elliott Wave International and was originally published under the headline Financial Advisors Take Heat for Market Losses (Will Anger Intensify?). EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Credit Suisse: How the Price of Credit-Default Swaps Provided a Warning

"... exceeded every high-water mark ... of the past 15 years"

By Elliott Wave International

Credit-default swaps were invented in the mid-1990s but a lot of people did not become aware of them until around 2000, and that awareness increased dramatically during the 2008 financial crisis. As you may recall, so-called CDSs were all over the news then.

Today, these financial derivatives are in the news again.

In a nutshell, credit-default swaps are insurance against a debt default: The higher the perceived risk of default, the higher the premiums.

With that in mind, back in November, the Global Market Perspective, a monthly Elliott Wave International publication which covers 50-plus financial markets, showed this chart and said:

Just last month, Credit Suisse -- the once-venerable Zurich-based global investment bank that [the Global Market Perspective] has warned about for years -- saw prices for its credit-default swaps (CDS) shoot past 300, indicating investors' increasing belief that the bank will default. As shown, CDS prices have exceeded every high-water mark set during every crisis of the past 15 years.

Since then, the price of those CDSs have approximately tripled, climbing north of 1000.

As a March 18 news item from The Financial Times noted:

Cost of insuring Credit Suisse debt dwarfs that of other banks
The price of Swiss lender's credit default swaps climbs to record high this week

During the same weekend that news item published, Credit Suisse collapsed, and the Swiss government brokered a deal which involved rival UBS buying Credit Suisse for $3.2 billion.

Worries about the global banking sector are not confined to Credit Suisse.

Here's a March 24 headline (CNBC):

Deutsche Bank shares slide after sudden spike in the cost of insuring against its default

Yet, at least one strategist expressed this (Yahoo! Finance, March 24):

Everything 'really is fine with Deutsche Bank' due to capital levels, [chief strategist] says

Other professional observers of the banking sector have also basically said "don't worry, big banks are in good financial health." But keep in mind that many of these same observers were caught off guard by what's already occurred with failed banks.

Elliott Wave International has been warning of this persistent optimism. The time will likely soon arrive when even those who are now expressing the most optimism will shift to pessimism.

That will be the juncture of what Elliott Wave International calls the "point of recognition."

You want to be prepared before then.

Now is the time to read Elliott Wave International's special report "How Safe Is My Bank?," which is valued at $49, yet, you can get it for free by following this link.

This article was syndicated by Elliott Wave International and was originally published under the headline Credit Suisse: How the Price of Credit-Default Swaps Provided a Warning. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Explosive Rise in Stock Market Volatility! Why It May Be Ahead

There are now S&P options that expire each day of the week. What that may mean.

By Elliott Wave International

Here's a Wall Street Journal headline from a couple of months ago that some people may have scanned without much contemplation (Jan. 11):

VIX, Wall Street's Fear Gauge, Extends Longest Lull Since 2021

While some investors may not consider a subdued VIX highly significant, Elliott Wave International does. As we've repeatedly stated: prolonged periods of low volatility in the stock market are inevitably followed by jumps in volatility -- and often, those jumps can be quite high.

With the "lull" in the VIX so extended, the next surge higher in volatility may be exceptionally high and last for an exceptionally long period of time.

Yet, there's at least one more strong reason to expect a super surge in the fear gauge.

This chart and commentary are from the March Elliott Wave Financial Forecast, a publication which provides analysis of major U.S. financial markets:

The CBOE Volatility Index (VIX) is purportedly a measure of expected future volatility in 30-day S&P 500 index options, but in fact it's a real-time reading of complacency vs. fear. The index has been subdued, declining to 17.06 on February 2 in conjunction with [an Elliott wave] rally. This was the lowest VIX since January 5, 2022, the very day of the Dow's all-time high. So, investors are as complacent now with respect to a stock market decline as they were when the blue chip indexes hit top tick in the great bull market.

Digging deeper, we find a segment of investors who are using the market to make casino-style bets. According to Bloomberg, more than 40% of the S&P 500's total options volume occurs in what is known as "zero-day-to-expiry" options, or 0DTE, as shown by this graph. These are options that expire within 24 hours, making them highly sensitive to changes in price because of the lack of time premium. In 2022, the CBOE and CME expanded existing options so that there are now S&P options that expire each day of the week, allowing investors to speculate using these ultra-short-term instruments. Options dealers have to hedge against the risks of outsized moves in 0DTE options, which increases the potential for an explosive rise in volatility.

If another major leg down occurs in the stock market, wrong-way bets in highly leveraged 0DTE options will spike volatility.

The question is: What are the chances that the price downtrend which began in January 2022 will intensify?

While Elliott wave analysis offers no guarantees (no market analytical does), the stock market's current Elliott wave structure is highly revealing.

If you'd like to learn how you can analyze financial markets using the Wave Principle, read Frost & Prechter's Wall Street classic, Elliott Wave Principle: Key to Market Behavior. Here's a quote from the book:

In markets, progress ultimately takes the form of five waves of a specific structure. Three of these waves, which are labeled 1, 3 and 5, actually effect the directional movement. They are separated by two countertrend interruptions, which are labeled 2 and 4. The two interruptions are apparently a requisite for overall directional movement to occur.

[R.N.] Elliott noted three consistent aspects of the five-wave form. They are: Wave 2 never moves beyond the start of wave 1; wave 3 is never the shortest wave; wave 4 never enters the price territory of wave 1.

... Elliott did not specifically say that there is only one overriding form, the "five-wave" pattern, but that is undeniably the case. At any time, the market may be identified as being somewhere in the basic five-wave pattern at the largest degree of trend. Because the five-wave pattern is the overriding form of market progress, all other patterns are subsumed by it.

If you'd like to delve deeper into the Wave Principle, here's good news: You may read the entire online version of the book free once you become a member of Club EWI, the world's largest Elliott wave educational community (approximately 500,000 worldwide members).

A Club EWI membership is also free and opens the door to complimentary access to Elliott wave resources on financial markets, investing and trading. Some of these resources (videos and articles) are from Elliott Wave International's own analysts.

Join Club EWI (free membership) by following this link: Elliott Wave Principle: Key to Market Behavior.

This article was syndicated by Elliott Wave International and was originally published under the headline Explosive Rise in Stock Market Volatility! Why It May Be Ahead. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.