Something's Not Right About This Rally

by: The Sovereign Society

Global stocks posted their first weekly rally since early June for the week ending July 18th. Last week, the Dow gained 3.6%.

That sounds great, but something is wrong here. Normally, the credit markets would confirm a strong stock market rally. Usually all the credit indices would rise because investors would raise their risk parameters and buy high-yield bonds and other risky fixed-income securities.

But that's not happening. This rally has not been confirmed by tightening credit spreads across most investment-grade credit markets. As I said Monday, that's partially why I believe this rally is a dead-cat bounce. Also, high yield or junk bond yields widened, not narrowed, last week.

And finally, look at the LIBOR or the London Inter-Bank Borrowing Rate. The LIBOR didn't change last week. That suggests banks are still nervous about lending to each other. Worse, long-term mortgage rates widened to 6.44% last week from 6.25% a week earlier. That's another dose of bad news for the housing industry.

If stocks continue to power ahead this week, be sure to follow credit spreads. If credit markets widen further, it will be a bearish omen for the market and the economy.

Until spreads begin to narrow again, remain extremely cautious.