Thursday, February 25, 2016

In The Long - Term, There Is No Fear In Equity Markets

The spread between junk bonds and US treasuries widens when something wrong is in the making - look at the chart below:

The chart shows the spread between junk bonds, represented by HYG, and 10-year US treasuries. When there is fear in bonds, the spread widens (the chart goes down). When things are good, the spread shrinks (2009 - 2011) - the chart goes up.

In 2007, when the last bear market in equities started, the spread was an excellent leading indicator - it started widening before equities started to go down.

In the beginning of 2009, when the bear market in equities was blowing at full speed, the spread started to shrink. Shortly after that occurrence equities started their bull market.

Since the first half of 2014 the spread has been widening quite furiously. However the bull market in equities is still intact. 

If the pattern repeats, the equities should follow the spread. What is more, due to the fact that spread has been in its bear market for quite a long time, I believe we may see quite a dramatic fall in the prices of equities.

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