Striking Similarity? 'Greatest Concern' in the US Market: Replaying August to October Last Year

The latest research report from the J.P. Morgan research team points out that there are quite a few similarities observed in April of this year compared to August of last year.

Analysts believe that when unexpected inflation increases and anticipated central bank interest rate hikes fail to materialize, investors begin to consider reducing their heavy positions or increasing hedges in risk markets. The most notable feature is that the rise in the 2-year U.S. Treasury (UST) yield eventually led to declines in stocks and credit markets starting from August.

Given the current high exposure of investors to risky assets and low cash allocations, the market may face higher risks.

Furthermore, the report also notes the new risk of downward pressure on the market following the Bitcoin "halving."

U.S. 2-year Treasury yield rises

J.P. Morgan's global market strategy report points out that last summer, the 2-year U.S. Treasury (UST) yield rose from 3.8% in early May to 4.9% in early August, a change largely overlooked by the stock and credit markets. However, once the 2-year UST yield began to consolidate at 5% or above, starting from early August, the stock and credit markets began to be affected. From early August to the end of October, the stock market experienced a correction of about 10%.

Since January of this year, the U.S. 2-year Treasury (UST) yield has risen from 4.2% to 4.9%, comparable to the levels in August of last year.

This increase has largely been overlooked by stock and credit investors from January to early April, similar to the situation from May to July of 2023.

The report warns that as the 2-year UST yield consolidates around 5%, a repeat of the "high-yield long" scenario seen from August to October last year may occur, triggering concerns about an economic hard landing and impacting risky assets.

The exposure to risk assets has increased.

The report also mentions that the leverage ratio of risk-parity funds was higher entering April compared to early August last year, and similar to the level at the end of 2021.

According to their metrics, investors' exposure to risky assets such as stocks and credit was higher in April than it was in August of last year.

The cash allocation is at a historical low.

The allocation of cash is very low compared to the stocks and bonds held by the private sector outside the banking system, that is, the ratio of M2 money supply to the stocks and bonds held by the private sector.

The cash allocation hit its lowest level during the sample period in early April, significantly lower than the previous low point in early August last year.

In addition, the current commodity positions appear to be close to neutral, and regardless of whether we look at momentum signals or speculative positions, the gold positions seem to be quite high. Compared to commodities and corporate bonds, the liquidity of government bonds deteriorated during the sell-off in April.

Tech stocks lack protection, and CTAs are starting to reduce their stock positions.

Short interest in SPY and QQQ ETFs is at a new low, indicating that the US stock market, especially the tech sector, has almost no protection.

Furthermore, systematic funds such as momentum-driven CTAs have begun to reduce their previously extreme stock positions, which may signal a shift in market sentiment.

In addition to the above characteristics, analysts believe that the current market also faces new risks. After the "halving" event, the price of Bitcoin may face downward pressure. The reasons include the excessive buying position shown by futures contracts, the fact that the price of Bitcoin is still far higher than the volatility-adjusted comparison with gold (at $450,000), or its predicted production cost after halving (at $420,000).

This article does not constitute personal investment advice, does not represent the platform's viewpoint, and the market carries risks. Please exercise caution and make independent judgments and decisions when investing.