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By Gregory Mannarino TradersChoice.net
“The Stock Market.”
What IS The Stock Market? Let us take a moment to define it. The stock market is itself a derivative of something else, in other words, the overall value of the stock market derives value from another thing, actually other thing(s). So, let us take another moment to break some of this down.
The debt market first and foremost is the largest aspect of the global financial system, and it eclipses the overall value of the stock market by exponents. There are many components to the debt market. Generally considering the debt market, which is also known as the bond market, participants can issue debt and buy debt.
Debt is also traded and swapped, as in credit default swaps. Debt can then be collateralized in a myriad of ways such as mortgage backed securities, debt obligations, and other various synthetic debt instruments.
Debt instruments, also known as securities, can then be further broken down into tranches with varying levels of risk associated with them, and then sold onto the market. Basic bonds and loans from banks are also structured into the overall debt market but are known collectively as elements of the credit market.
This mechanism of debt issuance and debt purchasing, along with “securities” created from the re-structuring and collateralizing of debt, goes then beyond face value—and into various other derivatives. Derivatives are literally “side bets” which are taken up on an underlying asset. Moreover, there are many, MANY, layers of derivative side bets.
To understand the risk(s) associated with the stock market, which derives its value in large part from action within the convoluted web of the debt market, one MUST have at least a basic understanding of how the debt market, and credit markets work—as I have briefly defined above.
The takeaway from having a basic understanding of the debt market is simply this—THE STOCK MARKET ITSELF IS A DERIVATIVE OF ACTION WHICH IS OCCURRING WITHIN THE DEBT AND CREDIT MARKETS AT ANY GIVEN TIME.
Today the overall debt market is in a HYPER-bubble which has subsequently pulled the stock market itself into a hyper-bubble, but the debt hyper-bubble is about to get much larger. If we understand that the stock market is a derivative of debt market action, and we know that the debt is going to continue to be inflated by the deliberate action of central banks, is there a way to measure risk in the stock market? Yes, there is.
The US 10-year yield is the benchmark, and is widely and closely watched by traders, investment banks, and hedge funds. The 10-year yield gives us a window, so to speak, into the goings on in the debt and credit markets. We can also observe the relative value of the dollar. There is a relationship which exists between the 10-year yield and the relative dollar strength or DXY, also known as the dollar index.
I have come up with a way to gauge overall market risk and put that into a single number. It is called the MMRI or Mannarino Market Risk Indicator. This is FREE for everyone and runs on a graduated scale. The MMRI is an indicator of market risk at any given time. I am happy to make the MMRI available to those who subscribe to the Trends Journal—again FOR FREE!
The MMRI can be found right on my website TradersChoice.net.