Déjà Vu: Is This Armageddon, or Just Another GameStop Short Squeeze?

Published by Matt Warder on February 25, 2021

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If it feels like you just read this article, it’s because you have.

Although the stories have sometimes varied a little, the overall theme remains the same.

Over the past couple of months, those stories have introduced some new characters who have pivoted the story in slightly different directions.

To start off the year, we had an absurd insurrection.

Then Bitcoin went bananas… and crashed.

We impeached a President who was no longer in office.

And then little old GameStop took down a couple of hedge funds, silver went on a massive run while gold prices crashed, Bitcoin returned to the moon, SPACs went crazy, it frickin’ snowed in Texas, Congress got trolled by a dude on Reddit, the guy from the Big Short all of a sudden woke up and said “OMG INFLATION!!!” and now oh yeah we’re back to GameStop again.

So, ask yourself now… Does the story even matter at this point?

The entire global economy jumped the shark last March when COVID-19 locked us all down.

Everything after that has essentially been a bastardized version of the panic attack scene from the movie “Airplane!”, with one absurd story after another lining up to slap panicky investors right in the face.

Meanwhile the market has played the role of Captain Rex Cramer (in turn played by the ever-straight-shooting Robert Stack) beating the living crap out of everyone in his path as he marches on to save the day.

Excuse me, sir, would you donate to the Reverend Moon?… *gets karate chopped*.

Source: Script of Airplane!

I mean, I get it… Pretty much everyone I talk to in the markets has been expecting another market crash for a good long while. I’ve even written about the possibility here before.

But one of the points I’ve been trying to drive home in these articles is that if you pay close attention to volatility, you can figure out if this is just a blip… or if it’s the big one.

About a month ago, I talked about volatility across all asset classes — not just stocks, but also interest rates, currencies, corporate bonds and U.S. Treasuries.

At the time, that chart just looked like this… one little blip.

Source: Bloomberg

That, we can handle.

Now, with inflation causing interest rates to start shooting skyward — and the U.S. Dollar Index fluctuating wildly between 89-90 — that chart has now added a couple more circles.

Source: Bloomberg

I know what you’re going to ask, and yes, that’s a little more concerning.

If we zoom in on interest-rate volatility in particular — as measured by Bank of America’s MOVE Index — we can see that although it still hasn’t hit its Nov. 3 peak of 64.37, it’s close.

And worse, it is now trending upward.

Source: Bloomberg

And although the U.S. Dollar Index appears to have started a mini trend over the past two months, it hasn’t quite fully developed yet.

Should this pattern hold for another month, though, there is a chance we could see an episode similar to what we saw last March, when the dollar tanked… and subsequently ripped higher.

Source: Bloomberg

But the most important thing to take away here is that high-yield corporate-bond volatility has yet to do anything.

Source: Bloomberg

Steady as She Goes… or Solid as a Rock if you’re more of an 80’s fan.

Armageddon this is not.

All of this is sending a simple message, really… Go to where conditions are steady and buy high yield.

That’s best done through the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG), which has done nothing but go up at a 20-degree angle for almost a year.