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Inversion diversion: Or, Mr Market tries to avert another cliff dive

Written By | Aug 15, 2019
blood running down Wall Street

“The Scream” by Edvard Munch, 1893 version. (Public domain image via Wikipedia entry on the painting, view modified by the writer)

WASHINGTON.  When I finally headed for bed early this morning around 1 a.m. ET, I made a quick check on market futures. Just to see what I might be in for at Thursday’s opening bell. Typically, futures were modestly up, not down. That indicated we’d likely get another whipsaw move today after Wednesday’s horrendous interest rate inversion diversion.* Which looked like this on yesterday’s closing update of the McClellan Oscillator.

inversion diversion

McClellan Oscillator, COB Wednesday, August 14, 2019. Chart courtesy of

The Chi-coms bluster. Then claim to offer hope

But apparently, over in the East Asian time zone where dawn had already broken, the Chi-coms busied themselves threatening Hong Kong anew. And, just for fun, they issued dire threats about what they’d do if the US even thought about imposing another round of tariffs.

Then, like magic, word came from Beijing that the Chinese government had experienced an abrupt change of heart. The Tylers of ZeroHedge take it from there.

“Everyone is already stopped out and it’s not even 8am.

“Barely 90 minutes after markets tanked after China vowed it retaliate imminently to Trump’s imposition of new tariffs, futures exploded higher on what was interpreted as a conciliatory headline from China that apparently reversed all the negative sentiment.


“How this was indicative of anything more than what it meant, namely tacit hope that the US would concede further without making any concessions of its own, is unclear but to algos the headline was all they needed to activate the afterburners on the BTFD [Buy The Effing Dip] program and the result was the following:”

inversion diversion

Dow Mini, Thursday pre-open, August 15, 2019. Chart via ZeroHedge.

Time to pull off that inversion diversion hedge

Oops. Looks like I’d better jump in at the open and take off that small inversion diversion hedging position in the double-short S&P 500 Index ETF (trading symbol: SDS). I put it on near Wednesday’s close. It looked like a good idea, as volatility, according to the VIX chart below, still looked crazy.

inversion diversion

VIX volatility index, COB Wednesday, August 14, 2019. Chart courtesy

That short position will get hammered quickly, so I’ll dump it right after the close, which I don’t generally do. After all, who knows where Mr Market will go next after kissing off yesterday’s inversion diversion. In this nutcase of a stock market, anyone predicting today’s closing averages is a fool.

Reliving Wednesday’s inversion diversion massacre

To reprise Wednesday’s stomach-churning inversion diversion action, let’s check out CNBC’s comments after yesterday’s sickening bear rout.

“Stocks plunged on Wednesday, giving back Tuesday’s solid gains, after the U.S. bond market flashed a troubling signal about the U.S. economy…

“The yield on the benchmark 10-year Treasury note on Wednesday broke below the 2-year rate, an odd bond market phenomenon that has been a reliable indicator for economic recessions. Investors, worried about the state of the economy, rushed to long-term safe haven assets, pushing the yield on the benchmark 30-year Treasury bond to a new record low on Wednesday.

“Bank stocks led the declines as it gets tougher for the group to make a profit lending money in such an environment. Bank of America and Citigroup fell 2.8% and 3.4% respectively, while J.P. Morgan also dropped 3%. The SPDR S&P Regional Banking ETF is down 2.65%.”

For reasons I’ll get to in another article, I actually like the big banks here. So if things go according to Hoyle, I’ll be a buyer at some point today.

From Maalox to Prilosec

After the past two hideous weeks, our portfolios here have been holding their own, but still…. Action has been consistently hideous, as even on days when stocks party hearty, you get a sickening feeling that you’ll pay for the fun on the morrow. And consistently, that’s what’s been happening. If we have fun today, dimes to donuts (or is that dollars to donuts?) we’ll be suicidal on Friday. (Which happens to be options expiration day, too. What fun!)

Bottom line. We’re out of Maalox here right now and may need to up the ante by picking up an overpriced pack of generic Prilosec at Costco. Tummies are rumbling, quite loudly. This is no way to invest.

Today’s wrap

This morning, CNBC just posted a survey of Wall Street’s latest box scores, which make it look like T.S. Eliot was wrong. August is the cruelest month.

“It’s been a volatile and poor week for stock investors. The S&P 500 fell 1.2% on Monday, followed by a 1.5% rebound in the next session, and then came Wednesday’s brutal sell-off of 2.9%. This kind of consecutive whiplash — down 1%, up 1% and down 2% — is relatively rare, occurring only 19 times the last 30 years, Bespoke Investment Group said. This jarring action usually doesn’t lead to a positive longer term outcome, Bespoke found, with S&P 500 returns 6 months out averaging a decline of 2.9%.”

We’re not sure of that “relatively rare” observation. The current insanity defies anyone who’s trying to establish a center of gravity for this market.

Anyhow, good luck to all us home gamers this morning. Odds these days are better in Vegas.

Stay tuned.

*NOTE: The inversion in question is the difference between the 2-year and the 10 year Treasurys. In normal times, the yield (effective interest rate) on the 10-year issue is, logically, higher than the yield on the 2-year issue. That’s because putting your money at risk for 10 years is riskier than putting your money at risk for just 2 years. But what we’ve seen lately is an unhealthy situation in which the 2-year issue is yielding more than the 10-year. That rarely happens. But it happened Wednesday. Hence, what I term the “inversion diversion.”

This switch from normalcy in Treasury yields is frequently a warning sign that occurs roughly 6 months, give or take, before a recession sets in. Which is what freaked traders and machines out Wednesday. Of course, the 3-month yield has been higher than the 10-year yield for at least a couple of months now, which actually bothers me more. Yet somehow, traders have mostly ignored this.

Bottom line: yesterday’s signal scared anyone invested in stocks, and so they bailed and bailed. When their margin account stops were hit, the bailing intensified. Hence, Wednesday’s nasty crash. Intriguingly, as I write this postscript (just before noon ET), the 10-year yield is once again slightly above the 2-year. But that 3-month yield still takes the case. Thus, Treasurys are still inverted in my book. FWIW.

Markets continue to bounce today, as the opening rally fizzled. But it has not yet died, except in the S&P 500 average. But we’re still in a dicey condition over all, smarting from yesterday’s nasty inversion diversion. You might say that traders, investors and high-speed machine and algos all have an inversion aversion. —TLP

– Headline image: “The Scream” by Edvard Munch, 1893 version. (Public domain image via Wikipedia entry on the painting, view modified by this columnist.)



Terry Ponick

Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Senior Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17