Research Excerpts

Credit Spreads: Key To Near Term US Stock Market Direction

Posted on: Tuesday, February 12th, 2013

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).

Keys To This Week, one of 8 different reports that we produce for subscribers throughout the month, is a detailed weekly outline of key market factors and corresponding charts pertaining to the US stock market and market sectors, US interest rates, the US Dollar, and economically-influential commodity prices that are most likely to influence US financial market direction during the next one to several months.


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 bard, 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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