The counter trend rallies in stocks and the dollar are nearly done. We may have to wait for market volumes to pick up from the vacation doldrums to see the results.
Quite a bit of the recent market action has been technical trade in light summer volumes, as the wiseguys bat prices around while the Bosses are at the Beach.
Until we see some confirmation, the rally is the rally and the charts are the charts.
Credit spreads point to end of equity rally, Merrill says
By Deborah Levine
MarketWatch
3:21 p.m. EDT Aug. 19, 2008
NEW YORK (MarketWatch) - Credit spreads, which represent the gap between corporate debt and Treasury yields, have been a pretty good predictor of how stocks perform - and they're not looking good.
When credit spreads widen, it signals investors are attaching more risk to lending money to companies. And wider spreads tend to foreshadow the stock markets' next move, according to Merrill Lynch chief North American economist David Rosenberg.
When credit spreads rise, as they are doing now, the equity market goes the other way 88% of the time, he said.
"Credits spreads, especially in the financial sphere, may remain vulnerable to upside pressure and this will only reinforce the vulnerability of this bear market rally in equities," Rosenberg wrote in a note.
For example, in mid-June, the spread between 10-year Baa-rated bonds -- the lowest investment grade rating -- and U.S. 10 Year Treasurys narrowed to 290 basis points, or 2.90 percentage points. That came exactly a month before the S&P 500 index recovered, Rosenberg said.
Now, the spread has again widened to 326 basis points, nearly as wide as in mid-March when the near-bankruptcy of Bear Stearns sent investors fleeing corporate debt and prompted a massive government intervention, including the firm's purchase by J.P. Morgan.
Although spreads have been widening over the past month, the S&P 500 has managed to rally 7% -- as of Monday -- after hitting a intermediate low in mid-July. The shares of financial firms were leading the rally, even though their corporate bonds have continued to lag behind other debt.
"So, we feel that investors should be put on notice that the divergence we have seen take place in the past month is unlikely to be sustained, in our view," Rosenberg said.
