Like Peanuts' family tree, the market dynamic is growing more complicated ... and risky. 

From my perch, we are, at best, in a period of high risk for the markets and likely limited returns.
 
At worst, we are  trending toward a trend change and, in the extreme, market lambs may be heading toward the slaughter.
 
Nevertheless, much like early 2000 and late 2007, few in the bullish consensus seem to understand, will admit or are threatened by the potential menaces that investors face. They include:
 
* "Machine Spirits": We have entered The Algo Zone (Hat tip RevShark) in which the dominance of passive strategies (risk parity, stat arb, volatility trending and ETFs) --  the subject of my discussion yesterday -- raise a risk that the market's mechanism and structure is on an unsound and non-value-based foundation. These strategies took us up and could take us down, especially when they are mostly on the same side of the boat.
 
 
* Peak Volatility: Many of the factors discussed this morning may also be leading to a trend change in volatility. With too many in the short vol boat, the abrupt change may be market-unfriendly and disruptive. I expect the sort of "flash crash" we saw last Friday in the Nasdaq to be repeated in the time ahead.
 
* Historically High Price/Earnings Ratios:  Valuations, on most metrics, are at the 95% decile (or greater). CAPE and market capitalization to GDP (Warren Buffett's favorite measure) are vivid illustrations of this point. Meanwhile, the non-GAAP S&P 500 price-to-earnings ratio is "only" at 18 times, the GAAP S&P 500 P/E is at an inflated 26 times and the difference between non-GAAP and GAAP P/E has never been wider.

 
* Extended and Changing Leadership: FANGs (an acronym for Facebook ( FB) , Amazon ( AMZN) , Netflix ( NFLX) and Alphabet/Google ( GOOGL) ) are overloved and crowded after having a disproportionate role in the market's advance over the last several years, and recent price action indicates exhaustion in the shares from elevated valuations. As I have written repeatedly, market leadership changes are often associated with bear markets.
 
I long have thought that financial stocks must be well-grounded and healthy for a market's core to be strong. I recently shorted bank stocks and hold to a negative view and outlook. Here, graphically, is the depiction of risk I see in the absolute level of rates and the 2s/10s curve): 

Source: Zero Hedge
 
The Orange Swan: The Washington Post has reported that special counsel Robert Mueller is investigating President Trump for obstruction of justice. This could mean that the administration's fiscal, tax and regulatory initiatives, which already seemed to be near their deathbed, will be further delayed and diluted.
 
* Fed Tightening: The Fed is tightening, and for the third time in 18 months has increased rates, which it did yesterday. Few will remember Edson Gould's rule of thumb of " three steps and a stumble," which states that stocks may fall after the Federal Reserve raises rates three times in a row without a decrease, according to the Market's Technician Association.  The idea is three increases show the Fed is serious about keeping rates at a relatively high level for a significant length of time. As previously discussed, the Fed's monetary largesse has depressed volatility and has provided a friendly backdrop for the elevation of stocks. This monetary setting is now changing.
 
* Bonds/Inflation: The message of the bond market and that of recent low inflation readings is that the rate of economic growth will be less than consensus; same, too, for corporate profits. Despite the consensus of rising interest rates, the bond market continues to be bought and yields continue to decline. Over the last week the yield on the 10-year U.S. note has broken under the trading channel of 2.20% to 2.60%.
 
On my last and perhaps important point (above), the chart below speaks volumes:

 
Source: Zero Hedge 

Good grief! It may be time to panic and sell stocks.
 
 
Editor's Pick: This article originally appeared at 9:00 a.m. ET on June 15 on Real Money, our premium site for active traders. Click here to get great columns like this from Jim Cramer, Doug Kass and other writers even earlier in the trading day.

At the time of publication, Kass and/or his funds were long SDS, SDS calls and SQQQ and short SPY and QQQ, although holdings can change at any time.

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

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