By: Kent Engelke | Capitol Securities

Will the selloff accelerate? A reason for the equity decline is the rise in interest rates. As noted many times, capitalization and liquidity have been sacrificed for speed and cost of execution. Such a scenario is creating a liquidity crisis.

Until yesterday, the two-day selloff of bonds from ETFs was generally orderly. However, with this written, major fissures are now appearing as many platforms have withdrawn from the markets creating a possible vacuum. If there are no buyers, what or who will support prices?

As noted a gazillion times bond trading mechanics have changed exponentially where money center bank bond inventories are down over 90% from 2008 levels. Total debt is up over 200%.

I can write with some certainty the selloff in equities is also the result of the lack of liquidity. There are emerging stories of market stabilizing mechanisms withdrawing from the equity markets in a similar manner as to what occurred in the early February swoon.

Bloomberg writes that yesterday was the eighth time this year the S & P 500 fell more than 2%, the greatest number since 2011. Last year there were zero 2% down days. Bloomberg further writes since 1980 the frequency of 2% declines in a non-recession year was less than 6 days. The S&P 500 declined 3.3%.

The NASDAQ 100, or the largest companies that comprise the NASDAQ, fell 4.4% yesterday, its worst drop since 2011. The NASDAQ Composite was off 4.1%, the biggest loss since 2016.

Will earnings rescue equities? As noted many times, EPS growth is greater for the “value” firms as compared to “growth.” The issue at hand is everyone owns growth creating the largest disparity between growth and value in history, a disparity amplified by the massive proliferation of ETFs.

Circling back around to the Treasury markets, Treasuries closed nominally unchanged but I can write with absolute certainty the typical municipal or corporate bond was down, the result of continued ETF selling. Treasuries were supported by a possible “flight to quality bid.”

What will happen today? Earnings season commences tomorrow with the release of three money center banks’ third-quarter results.

Last night the foreign markets were down. London was down 1.62%, Paris was down 1.56% and Frankfurt was down 1.10%. China was down 6.54%, Japan was down 3.89% and Hang Sang was down 3.52%>

The Dow should open sharply lower following a selloff in the foreign markets. The selloff is being blamed on a number of events. I think the three most significant are rising interest rates, a massive concentration of wealth in a few sectors and the extreme popularity of the index trade, and the potential implications of a massive intrusion/hacking into the technology supply chain.

The 10-year is off 3/32 to yield 3.18%.