I have always felt that the greatest single risk to recovery would be if there were a precipitous loss of confidence in US government bonds. I believe that from a fundamental point of view, such a development would be unwarranted at this time. However, the cycle of crisis and recovery is mostly about psychology, not some specific fundamental metrics.

Everything, everything, hinges on the ability to sustain fiscal, and especially monetary, stimulus. A 10-year yield significantly above 4% would jeopardize the entire program.

There can be no doubt that yesterday's action was a wake up call for the Fed, Treasury and the entire market. Not being able to take for granted the ability of the US to finance its deficit introduces a risk factor that could literally raise risk premiums on everything. And if the fear in bond markets were to get out of hand, it would trigger a financial and economic catastrophe.

I still have my 100% long core position with additional leveraged longs.

However, developments in the bond market must be monitored closely. Long bonds need to stabilize and remain below 4%, and we need to see a resumption of the contraction of private credit market spreads. In addition, a declining dollar is not a bad thing (it can even be a good thing) as long as it is fairly gradual and is clearly accompanied by a contraction of private credit market spreads. This would all be consistent with a decline in risk aversion (bullish).

If the government bond market stabilizes and private credit market spreads resume their contraction, the equity market will be able to resume its climb towards 1,100 and beyond.

If not, all bets are off.