Credit Default Swaps may be flashing a warning
The trend in credit default swaps has reversed back to a downtrend
As highlighted in late September, a downtrend in the CDX Index can act as a warning sign
The model is best not used as a standalone trading model but as an alert of potential volatility and downdrafts
A quick review of credit spreads
To allow this article to stand on its own, the text below in this section and the An Overview of Credit Default Swaps section below are nearly identical to the text discussing these topics in this article, dated 2023-09-26.
This topic is being covered again because the 14-week EMA recently crossed back above the 25-week EMA.
A "credit spread" measures the difference in the current yield for a lower-rated security versus a higher-rated security. The lower the rating for a given debt instrument, the higher the likelihood the issuer will default and be unable to repay all of the promised interest and principal. The higher the rating for a given debt instrument, the less likely the issuer will default and be unable to repay all of the promised interest and principal.