we need to address a major issue that is about to unfold in the stock market, particularly the S&P 500, tech stocks, and the Dow. The signs are evident, and it’s crucial to be prepared for a significant pullback.
Liquidity issues, coupled with the need for the U.S. Treasury to replenish its funds, pose a potential threat to banks and equities. Will the Federal Reserve step in to save the day? That remains uncertain. Read on to understand the reasons behind the impending crash and how you can protect yourself.
The Looming Liquidity Crunch
Months ago, we foresaw liquidity issues arising once the U.S. Treasury had to replenish its funds. Now, with the Treasury’s bank account rapidly depleting, the urgency to raise funds has reached a critical point. It is essential to comprehend the gravity of this situation and its potential impact on the stock market.
Typically, the U.S. Treasury maintains around $600 billion in its bank account to cover global transactions. However, as of June 1st, their funds have dwindled to a mere $37 billion.
With the X date set for June 5th, it is evident that immediate action is required to avert missing payments. This urgency has led the Treasury to conduct massive auctions, flooding the market with new bonds to refill its coffers quickly.
Banks and Equities at Risk
The auctioning of treasuries and the subsequent drain on liquidity will have adverse effects on banks and equities. Investors might opt for risk-free treasuries that offer up to 6% annualized returns, diverting their funds from high-risk, overbought markets.
Moreover, quantitative tightening by the Federal Reserve has already reduced reserves, leaving banks to hoard cash in anticipation of an imminent recession.
Examining technical indicators, the stock market appears significantly overbought, reaching levels rarely seen in recent times.
The Bollinger Bands, in particular, indicate an extremely overbought situation, suggesting a potential short-term sell-off. It is important to note that technical analysis provides additional evidence supporting a market correction.
Financial institutions like JP Morgan and Citigroup have conducted analyses based on available data. Their estimates suggest that the stock market could experience a median drop of 5.4% over the next two months due to the liquidity drawdown.
JP Morgan predicts a liquidity decrease of approximately $1.1 trillion from the start of 2023, which is a substantial drain on liquidity.
Preparing for the Impending Crash
Given the data available, it is crucial to assess the potential risks and take appropriate measures to protect your investments. While there are no guarantees, the current circumstances indicate a high probability of a market correction. Therefore, it is advisable to consider adjusting your portfolio and adopting defensive strategies.
The stock market crash in the USA appears imminent, with liquidity issues and the urgent need for the U.S. Treasury to replenish its funds serving as catalysts. As investors, it is crucial to stay informed and take proactive steps to mitigate potential losses.
While the Federal Reserve’s intervention remains uncertain, being prepared for a market correction is prudent. Evaluate your investment strategy, consider risk-free options, and seek professional advice to navigate these challenging times successfully.
Disclaimer: This article is for informational purposes only and should not be considered financial advice. Investing in the stock market carries risks, and readers are urged to conduct their own research and consult with financial professionals before making any investment decisions.