Preferreds Back On The Brink

by: Eric Parnell, CFA

An important indicator for the stock market is teetering on the brink.

The Preferred Stock market is threatening to break down once again. As mentioned in previous articles, the Preferred Stock market is an important leading indicator of underlying stress in the financial system. This is due to the fact that financials constitute roughly 85% of the entire Preferred Stock market. This includes a 25% allocation specifically to European financials. In 2007, the breakdown of the preferred stock market was an early warning signal for the sharp correction in stocks that eventually followed in 2008. Click to enlarge:

Click to enlarge

After selling off sharply in early August, the Preferred Stock market as measured by the iShares S&P U.S. Preferred Stock Index ETF (NYSEARCA:PFF) initially recovered strongly to more normal levels. But it has since been wobbling with uncharacteristically choppy price movements. And it is now approaching critical price levels once again following Wednesday’s sharp market sell off.

The Preferred Stock market will merit a close watch in the coming days. A decisive break below the $36 level on the PFF would be a particularly troubling development, as it would signal that genuine solvency concerns about global financial institutions have returned for investors. Such a break would signal the potential for considerable stock market weakness in the days and weeks ahead.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.