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Credit Spreads Key To Near Term Market Direction

The following (green highlights) is one of the 10 charts and corresponding commentary/analysis from our Monday February 11th Keys To This Week report (access requires subscription, click here to view a sample report).


Excerpt From: Keys To This Week
Subject: The US Stock Market, Key #5 of 12
Date: February 11th, 2013

Topic: Credit Spreads, High Yield/BAA Corporate Bond Spread

The red line in the upper panel of Chart 2 below plots the BofA Merril Lynch US High Yield Master II Option-Adjusted Spread daily since 2012.

The rightmost pink highlights point out that the spread has been widening (actually, by 36 bps) since late January, while the rest of the pink highlights show that previous similar widenings have coincided with or led every near term peak in the S&P 500 (black bars, lower panel) during the past year.

The longer this spread continues to widen, indicating that the bond market is pricing in an increase in credit or repayment risk for the companies issuing these bonds, the more likely we are likely to see another near term peak emerge in the US stock market.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.