Weekly Update: 13 of 14 Bear Market Signals Have Triggered
Good evening, and welcome to this week’s edition of Stealth Trades!
Every market crash leaves the same fingerprints.
Before the 2000 top and before the 2007 top, the same warning signs showed up. These are specific, dated, measurable events.
There are a total of 14 bear market signals.
Thirteen of them have already triggered. The last one has not.
This does not mean we are days or weeks away from a crash. The first 13 signals arrived by January in 1999, and the Nasdaq went on to double that year before eventually crashing.
So, don’t let this scare you. But I would rather you be aware of where we stand than caught off guard.
The first four signals are the easiest to spot:
#1 – Record debt issuance in the hot sector.
Telecom companies issued over five hundred billion dollars of bonds between 1996 and 2001. That was the fuel.
Morgan Stanley puts AI-related debt issuance at roughly five hundred seventy billion dollars this year. Bonds from the hyperscalers hit two hundred twenty-five billion by mid-year — up nearly a thousand percent from last year.
Check.
#2 – The debt moves off the balance sheet.
In 2006, Wall Street issued about $521 billion dollars of CDOs — the vehicles that hid mortgage risk where you couldn’t see it.
Moody’s now counts $1.2 trillion dollars of off-balance-sheet AI commitments. Microsoft alone disclosed $329 billion dollars of leases that haven’t even started yet. That number was $93 billion a year earlier.
And starting next fiscal year, Microsoft extends the assumed useful life of its data centers from fifteen years to twenty-five. It’s a trick to shrink depreciation and create the illusion that profits are higher than they are.
Check.
#3 – Sellers start financing buyers.
In the last 90’s, Lucent lent $8 billion to its own customers so they could buy Lucent equipment — then booked those loans as revenue. Nortel did the same.
By 2000, McKinsey $25.6 billion of this across 9 equipment makers.
Today Nvidia holds $30 billion of equity in OpenAI, $10 billion committed to Anthropic, and a signed agreement to buy CoreWeave’s unsold capacity through 2032.
Checked.
#4 – Capital spending outruns cash flow.
In the 2001 telecom cycle, capital spending outran revenue growth by about 32%. Everyone swore the demand was coming.
Today, AI capex is outrunning AI revenue by 46%. Wider than the telecom bust — and that number comes from CreditSights.
And Oracle spent $55 billion on capex last fiscal year against -$23 billion of free cash flow.
Check.
The next 4 markers come from the crowd – retail investors like you and I who act predictably at euphoric peaks.
#5 – Record margin debt.
Margin debt is money investors borrow against their own portfolios to buy more stock. It peaked six months before the 2000 top and four months before the 2007 top.
Today: $1.53 trillion; up 51.5% in a year.
That growth rate has appeared exactly three times before. 2000. 2007. 2021.
Check.
$6 – Record IPO volume.
1999 produced roughly 480 internet IPOs with an average first-day pop of seventy-one percent.
American companies raised $251 billion of equity in the first half of this year – an all-time record.
IPOs alone were $148 billion. That matches the entire record year of 2021 — in six months. And SpaceX by itself raised $86 billion, the largest IPO in history.
In 1999, the mania was the speculation and wild moves. Today, it’s the size.
Check.
#7 – Retail investors pile into leverage.
1.2 trillion dollars went into US-listed ETFs this year — double last year’s pace. Semiconductors are the number one sector.
And there are now leveraged chip funds — products designed to deliver two or three times the daily move of an already violent sector — pulling in record money. They even had them for SpaceX the week it went public.
Check.
#8 – Insiders sell and nobody buys.
Angelo Mozilo sold 139 million dollars of Countrywide stock in 2006 and 2007 while defending the loan book on television.
Over the last twelve months, insiders at Nvidia, Palantir, Alphabet and Meta sold 3.4 billion dollars of stock.
Insider purchases over that same stretch? Zero. Not one share.
Check.
There are also two “symbolic signals.”
#9 – The Super Bowl.
In the 2000 Super Bowl, 17 dot-com companies bought Super Bowl ads at $2.2million apiece. By the next year’s game, only 3 of those 17 companies still existed.
We saw it again four years ago – February 2022. They nicknamed it the Crypto Bowl. FTX, Coinbase, Crypto dot com and eToro spent $44 million dollars in a single afternoon. Larry David for FTX. LeBron James for Crypto dot com.
FTX filed for bankruptcy nine months later. The founder went to prison.
Coinbase stock finished 2022 down 86%.
Crypto dot com cut 20% of its workforce that June. Then they did it again in January.
And at the next Super Bowl? Zero crypto ads. The deals all fell apart.
February 8th of this year, 23% of the Super Bowl was AI companies. 15 ads out of 66. OpenAI. Google. Amazon. Meta. Anthropic.
To be clear, none of this tells you the day of the top. Especially in this market.
But it tells us we’re in the neighborhood.
Also… check.
#10 – The picks-and-shovels supplier becomes the most valuable company on earth.
Cisco sold the routers that built the internet. On March 27th, 2000, Cisco passed Microsoft to become the most valuable company in the world.
Seventeen days after the Nasdaq peaked.
On May 13th of this year, Nvidia became the first company in history worth $5.5 trillion dollars. The high of the Nasdaq, as of today, was three weeks later on June 3rd.
Check.
#11 – The regulators start writing memos.
The Bank for International Settlements in March. The Federal Reserve in May. The Bank of England in July. And Moody’s on July 24th, warning that “unprecedented” AI spending threatens the credit quality of Amazon, Meta and Alphabet.
The BIS has its own word for how this is being financed – shadow borrowing. Roughly 15% of the entire private direct-lending market — a market north of a trillion dollars — is now lending into AI and tech. Four years ago, that was basically nothing.
In July, the Bank of England published a chart of how expensive American stocks are relative to bonds, and wrote that it has moved toward “levels not seen since the dot-com bubble.”
And that’s coming from a central bank.
Check
The final three markets come from the credit market. These, in my opinion, are the ones that actually matter.
#12 – Credit in the hot sector turns while everything else stays calm.
The ABX index tracked subprime mortgage bonds. On January 19th, 2007, the BBB-minus slice traded at 97 and a half. By February 27th it was at 62.
Down 36% in five weeks.
Today, Oracle’s five-year credit default swaps went from 145 basis points in January to over 215 in July. It’s an all-time record — above where they traded in the 2008 financial crisis. CoreWeave’s are north of 800.
Check.
#13 – The funding market starts choking.
In June of 2007, Merrill Lynch seized 850 million dollars of AAA-rated collateral from a Bear Stearns hedge fund — and couldn’t find a buyer for it. That was the market discovering, in public, that the paper had no price.
Today, coverage on hyperscaler bond deals — how many buyers show up per dollar offered — fell from about five times in February to under two times in July.
And CoreWeave’s term loan repriced 125 basis points wider, with lenders forcing back maintenance covenants that have been absent from leveraged loans for over a decade.
Check.
And finally, the one that has not yet fired.
#14 – Lenders get scared.
When you loan money to the US government, you get paid a little bit of interest. When you loan money to a risky company that might not pay you back, you demand more.
That difference is what matters.
When lenders are relaxed, that gap is small. When lenders get scared, they demand more, and the gap gets wide.
Right now, that gap is 2.7 percentage points.
America’s riskiest companies are borrowing at less than three points above the US government.
That is near the smallest that gap has ever been. Smaller than it was in 2021. Lenders are charging almost nothing to take real risk.
That gap has a name, by the way. On Wall Street they call it the ‘high yield spread.’ And it is the single most reliable warning light of a pending crash.
In 2007 it sat at 2.3 percent in the spring. By August it was at 4 percent. Four months before the S&P’s peak.
Back in 2000, that gap started widening in the spring. Once the gap exceeded 3.5 percent, it never came back. By November of that year, the Bank of England noted junk borrowing costs had reached the levels of the early 1990s recession.
Credit was pricing a recession. Stocks were pricing perfection.
Credit was right.
Here’s the picture today…
Oracle’s default insurance is at a record above 2008. Lenders are demanding covenants they haven’t asked for in a decade. CoreWeave is borrowing at 15% interest. And broad corporate credit is priced like nothing is wrong at all.
It sounds like a contradiction. And it is. That’s the whole point. This is exactly what early 2007 looked like before peaking later that year.
So, this one is still unchecked. But it’s the one to watch.
Open up TradingView and chart the following ticker symbol: BAMLH0A0HYM2.
That is the symbol for the High Yield Index Spread. Today it sits at 2.71. When it hits 3.5, things are getting ugly. And if it stays there, elevated, above 3.5% for more than a month? Get out.
That’s it. That’s the final warning.
Best wishes for your trading,
