Tuesday, March 29, 2016

The Widening Spread Between Junk Bonds And 10-Year Treasuries Signals A Drop In Stock Prices

A couple of weeks ago I presented a thesis that the spread between junk bonds and US treasuries widens when something wrong is in the  making. This metric has proved to be particularly effective when the long-term perspective is considered. 

However, in the short-term this metric is also of some value - please, look at the chart below:

                             source: www.stockcharts.com 

The chart shows that every time the spread between junk bond and 10-year treasuries starts to widen (the downtrend is renewed) the broad equity market, represented by S&P 500, follows it (starts to go down a little bit later).

Since mid-March the spread has been widening so, if my thesis is correct, the broad equity market should start its leg-down soon.

Another thing - as the chart below shows, the last S&P 500 strong increase was made at decreasing volume (yellow area):

                        source: Simple Digressions

Since the middle of February 2016 the index went up 12% but the average daily volume went down from 3.5 billion shares to 2.3 billion shares (a decrease of 34%). It is by no means a bullish pattern...


  1. There is only so much PPT can do

  2. Yes, they can but in 2007 / 2008 they also could and...You know what happened