To the clients and friends of ProfitScore:

Our flight-to-quality indicator had been building towards the end of November and went long on the Wednesday before Thanksgiving. This trade can last for a few days or several weeks. It can also chop around depending on the data. It is uncommon for this trade to happen when equity markets are at new highs, but it has happened in the past, and those trades have historically been profitable.
 
Below is a picture of the indicator. When the indicator hits the bottom decile of its range, it warns of a flight-to-quality movement away from the corporate bond market, which generally gives U.S. Treasuries a bid.

We also have a stress indicator for the U.S. equity market. It had been warning of impending danger for the last several weeks in November. This indicator is not a buy or sell indicator, but it is used to measure stress. When the indicator is below the zero-line, equity market volatility is generally significantly higher. Below is what that indicator looks like. There is no data relationship between these indicators. The fact that both are firing at the same time is a strong warning.

Historically, when the markets move from one environment to another, that transition causes market stress. This probably has a lot to do with why the yield curve inverts. Rising inflation is putting emerging markets under a great deal of stress. If their currencies collapse like Turkey’s, it is difficult to pay back their debts in U.S. dollars, causing problems in the financial system. The data we used to evaluate this stress was helpful for us in navigating the volatility at the end of November.  

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