Are Stocks on a “Sugar High?”
Have you ever had a sugar high?
A sugar high is when you eat something sweet, and the sugar induces a kind of temporary mania. Suddenly you feel as though you’ve got loads of energy and could take on the world.
However, sugar highs are fleeting. Believe me, I know.
My wife took up baking as a hobby 10 years ago. Her specialty is high-end French pastry. And aside from making it extremely difficult for me to continue to fit into my suits, her creations have resulted in many a sugar high for me.
And all of them have ended the same way…
I usually experience a “sugar crash” and feel like I need to take a nap.
I was thinking about sugar highs this morning when I noted stocks were once again exploding higher. The market is now well above 2,700 on the S&P 500 – some 700 points up from the lows two weeks ago.
Some of the worst hit industries (cruise lines, theme parks, etc.) are up 30% from their lows.
The question now is this:
Is this a “sugar high” and stocks are about to crash again… or is the bottom in and things are on the up and up going forward?
With that in mind, let’s turn to the debt markets.
A Great Indicator of What’s to Come
The debt markets (also called credit markets) are larger and more sophisticated than the stock markets.
Indeed, credit picked up on the corona-collapse weeks before stocks did. The red circle below indicates the debt markets, the blue circle indicates stocks.
With that in mind, I want to note that high-quality credit – credit for companies that are allegedly well financed/less risky – has just begun to break above resistance.
If credit can break above this line and stay there, then I would argue this rally is the real deal and not a sugar high.
This is THE line I’m watching. While it’s tempting to go “all in” on stocks, we still don’t know what the economic fallout from the shutdown will be.
So I’m watching credit to make sure this is the real deal… and not a sugar high that will lead to a nasty crash.
Editor, Money & Crisis