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Stocks remain blissfully unaware of the problems in the debt/ credit markets.

While stocks get most of the attention from the media due to their greater volatility (greater volatility means a greater likelihood of producing significant gains quickly), the reality is that stocks are in fact the junior-most asset class in terms of capital structure.

What I mean by this is that if a company were to go bankrupt, stockholders would be THE last people to get paid after all the debt and creditors. As a result of this, the credit markets, NOT the stock markets are usually the first markets to react to changes in the economy.

Put simply: credit investors, particularly high yield credit investors (investors in “junk bonds”) are usually much more sophisticated and sensitive to potential risks because if things go wrong there is a high likelihood that they lose a LOT of money.

I mention this because the high yield credit ETF (HYG) has taken out its bull market trendline for the first time since the April lows. Even worse, HYG has failed to reclaim this line despite multiple interventions by the Trump administration.

This is a MAJOR warning that something BAD is brewing in the credit markets. We get confirmation of this from the Senior Loans (another credit instrument). Here again, the index has broken below both its bull market trendline. It’s also broken its 8-day exponential moving average (EMA) as well as its 21-EMA. This is a major signal that momentum has broken down and something BAD is coming.

Stocks remain in la la land about these risks. But they likely won’t for much longer. We’re already beginning to see this situation spread to major financial firms. Jeffries Financial Group (JEF) is one of the first firms to reveal it has exposure to these issues. JEF has over $60 billion in assets and its shares are currently imploding.

Put simply, something VERY bad is brewing in the banking system. And the big question for investors is whether these issues will trigger a stock market crash. 

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