Not Everything Was Down Yesterday

While the S&P 500 and Nasdaq were both notoriously weak yesterday given the usual positive bias during Christmas week, not everything was down. In the credit markets, corporate bonds had a strong day, and if these trends continue, it will bode well for stocks.

As shown below, using the iBoxx ETFs as a proxy, both investment grade (LQD) and high yield (HYG) corporate bonds had decent gains yesterday after rallying nicely over the past week as well. The stock market has really played second fiddle to the credit markets during this downturn. Many investors have been waiting for the corporate bond market to show signs of life before getting back into more risky assets. From the looks of these two ETFs, the credit markets are finally gaining some positive traction.

click to enlarge

One market indicator that did decline yesterday was the VIX. It is now down five days in a row and closed below 45 for the second straight day. If this volatility indicator can manage to work its way down into the 30s (and ultimately the 20s), we should see higher stock prices.

Comments

[Steve in TN:]

I wish there were more corporate bond ETFs available. I did buy LQD near the bottom, and it's a great fund, but I wish there was an intermediate term corp. bond ETF to buy along with the long-term, LQD. If anyone knows of one please let me know. I may be forced to look at closed-end bond funds.

As far as the VIX is concerned, I don't believe there is any lead or lag with this indicator. Sure, when it drops below 30 it will simply point out that the market has ALREADY risen significantly. The reverse is true when it rises.

2008 Dec 23 09:58 AM

[jepittman:]

IMO these trends are likely to continue. The yields in short term securities have disappeared due to Federal Reserve action. Investors needing income will be forced to move out the risk curve. As the credit markets thaw money will also move into higher yielding equities.

2008 Dec 23 10:15 AM

[dawase@gmai...:]

It's not a foregone conclusion that the actual risk of these securities has decreased. I think this fact gets highlighted some time next year.

2008 Dec 23 10:25 AM