3 Takeaways
Watch for continued widening in high-yield credit spreads as both U.S. and European markets show signs of renewed stress.
Monitor liquidity conditions closely—rising effective federal funds rates and a stronger dollar suggest tightening financial conditions may accelerate.
Keep an eye on the Equal-Weight S&P 500 (RSP) and regional banks (KRE) for confirmation that risk repricing is broadening across equity sectors.
Stocks were fairly weak today, and thanks to Nvidia, it didn’t look nearly as bad. The S&P 500 fell just 28 basis points, but the RSP Equal Weight ETF declined by more than 80 basis points. In fact, there were over 1,400 more decliners than advancers on the NYSE. That left the overall S&P 500 market-cap-weighted index range-bound since last Friday.
The Equal-Weight RSP ETF has a fairly well-defined rising wedge pattern, similar to the one that formed at the end of 2024.
The HYG ETF clearly broke a long-term uptrend today and also fell below its 20-day moving average. This is the first time that has happened since April.
If you take the SHY ETF and divide it by the HYG ETF, you get a decent proxy for high-yield credit spreads. This ratio indicates that high-yield spreads are breaking out of a downtrend, with momentum now turning sharply higher.
We’re also seeing the same development in European high-yield credit, as well as in sovereign markets, with Italian-German spreads showing signs of potential widening.
It appears that the market may be suddenly repricing risk. The regional bank KRE ETF has also broken its uptrend and is clearly trending lower.
It could very well be that the ghost of “liquidity gone” is starting to catch up with a broader swath of the equity market. Today, the effective federal funds rate ticked higher to 4.10% from 4.09%, up from 4.08% when the Fed cut on September 17. As of September 2023, do you know how many times the effective funds rate changed outside of a rate cut? Zero. Do you know how many times the EFFR has changed since September 2025 began? Two.
Meanwhile, the dollar continues to rally, and based on the EURUSD chart, it may have strengthened even further. The EURUSD just fell below support at 1.156, which means the next support region is around 1.14.
The 3 ghosts of tighter financial conditions—wider credit spreads, a stronger dollar, and tighter liquidity—are rising.
-Mike
Glossary by ChatGPT
Basis Point (bps): A unit equal to one hundredth of a percent (0.01%), used to measure changes in interest rates or yields.
Credit Spread: The difference in yield between two bonds of similar maturity but differing credit quality, reflecting perceived default risk.
Effective Federal Funds Rate (EFFR): The weighted average interest rate at which banks lend reserve balances to other banks overnight.
Equal-Weight ETF (RSP): An exchange-traded fund that gives each stock in the S&P 500 an equal weighting, reducing concentration risk in large-cap stocks.
EURUSD: The currency pair representing the exchange rate between the euro and the U.S. dollar.
High-Yield Credit: Bonds issued by companies with lower credit ratings, offering higher yields to compensate for higher default risk.
Liquidity: The ease with which assets can be bought or sold without significantly affecting their price.
Rising Wedge Pattern: A technical chart formation that typically signals a potential bearish reversal as prices rise within converging trendlines.
Sovereign Spread: The yield difference between government bonds of two different countries, often used to assess relative credit risk.
Disclosure
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
Awesome chart - SHY ETF divided by the HYG ETF