His fund is up 60% this year after he called the March bottom — now, he sees potential for a ‘severe collapse’


Michael Gayed says he’s not trying to scare anyone, but you wouldn’t know it from his latest take.

Back in May, the fund manager warned of the possibility of two crashes: first bonds, then stocks. With his ATAC Rotation Fund
ATACX,
-0.06%

continuing to deliver the goods — it’s up almost 60% so far this year to rank among the best in its category — he’s still waving the yellow flag.

“It is a wild time in the markets,” said Gayed, who also runs the Lead-Lag Report. “Despite a crippling global pandemic, where the U.S. is failing miserably at a response with daily record after daily record cases being broken, and a U.S. economy that seems to be teetering on the edge of yet another Fed Monetary Policy response, stock markets have not seemed to blink when recovering.”

Yes, 2020 is certainly unique, considering, as he pointed out, that stocks crashed by more than 30% at one point, only to rally almost 50% from there. All that in less than eight months.

After having been bullish near the March bottom, Gayed now says that leading market indicators could very well be signalling a “severe collapse” in stocks.

The yield on the 10-year Treasury
TMUBMUSD10Y,
0.534%

, for instance, is looking at around 0.5%, while the yield on the 30-year
TMUBMUSD30Y,
1.197%

is under 1.5%., which he says is setting up for a potential reversion to the mean.

“It’s often said that bond-market investors are the smart money and tend to lead the stock market in anticipating economic activity,” Gayed explained. “The fact that yields have not risen meaningfully (quite the opposite) in the very short term is quite troubling as historically such short-term movement has tended to precede major periods of equity stress.”

Add to that, action in the utilities sector, which is seen as a recession-proof, safe-haven investment, could spell trouble for the broader market, he said, pointing to this chart showing how the defensive investments have managed to outperform the S&P 500 in the past month:

“That should raise some red flags as an equity investor, and frankly this alone gives me pause,” he said. “A similar movement occurred right before the COVID crash this year.”

Lastly, complacency could become a serious issue, with Gayed pointing to several factors, including the wild recent trading antics of Robinhood traders.

“The S&P 500 is now positive in a year that is expecting economic catastrophe. The Nasdaq is flying. And no one seems to think the market can ever go down,” he wrote in a recent note. “It sure feels like everyone forgot that investing in stocks carries risk — and the conditions are changing so rapidly right now, it looks like risk might come back into full force.”

No big crash Monday, with the Dow Jones Industrial Average
DJIA,
+0.43%

, S&P 500
SPX,
+0.76%

and Nasdaq Composite
COMP,
+1.48%

all starting off the week in the green.



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His fund is already up 34% this year, and there’s more to come if the stock market crashes like he’s predicting


On Feb. 27, Michael Gayed called for a double-digit drop on the S&P 500. He followed that timely prediction in March with a forecast for a melt-up in stocks at the end of the month. He backed up that outlook in an interview with Bloomberg radio.

Clearly, he’s had his finger on the pulse of this volatile market since the coronavirus began spreading in the United States — just look at the 34% rally in his ATAC Rotation Fund
ATACX,
+2.05%

for proof that his methods, in this climate at least, are paying off nicely.

If he’s got it right again, the pain is far from over for investors.

“Risk-off is about to return in two waves — first bonds, then stocks. Two crashes,” Gayed, who also publishes the Lead-Lag Report, told MarketWatch over the weekend.


‘This feels like a home construction project. It’s going to cost more money and take longer than any estimates.’


— Michael Gayed

He explained that he sees a “significant risk” that the yield curve steepens in a way that will shock markets and trigger a crash in Treasurys
TMUBMUSD10Y,
0.679%

.

“Reflation bets are increasing everywhere, and oil printing a negative price in the face of that suggests there is a very real feeling that global central banks and governments will stop at nothing to counter the deflationary forces of staying at home,” Gayed said. “Factually, inflation expectations have been rising alongside food prices due to supply-chain issues. Combined with unlimited QE, which in the past has caused yields to rise, it looks like bonds collapse first before stocks.”

He also touched on a theme that has many investors, especially the mom-and-pop types, scratching their heads. How can stocks continue to rally against what’s shaping up to be a depression in the economy? “The greatest disconnect in history,” as Gayed describes it.

Read:Why this screenshot of Jim Cramer is ‘everything that is wrong with America’

Here he is talking about that “disconnect” last week with famed bear Marc Faber:

Ultimately, Gayed expects to see yields spike as they did prior to the 1987 crash.

“Should that occur, as I think is likely,” he said, “the conditions then would set up for another stock market crash afterwards as the overreaction to the reflation narrative comes to grips with the facts on the ground that life, at least for now, is going to look and feel very different for some time.”

Read:Beware, the market’s being supported by ‘nothing more than an ideological dream’

As for the timeline, Gayed said it could all take place before year’s end.

“This feels like a home construction project. It’s going to cost more money and take longer than any estimates,” he said of the pandemic. “In the absence of a vaccine, behavior’s changed in a way that will make any longer-term gains unjustified no matter how much money Papa Powell prints.”

After a strong finish to last week, the stock market took a hit early in Monday’s session, with the Dow Jones Industrial
DJIA,
-0.87%

off triple digits. The S&P 500
SPX,
-0.53%

and the tech-heavy Nasdaq Composite
COMP,
+0.12%

were also moving lower.





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