3 replies to this topic

[nimblebear]

http://www.msnbc.msn.com/id/19808475/

[arbman]

The spreads are at the caution zone, but they are increasing very rapidly, this is the North American high yield (junk) chart. The credit spreads are now around 400bps, or 4%...

The market can certainly rally more solely based on this chart, but there is more, there are the expectations set too high and the deterioration in the general market breath. So, the prices went ahead of the internal strength.

What should happen, normally a correction. However, it is important to see where this is going. If the spreads breach 5% and start to climb upward while the market weakens further, I can guarantee you at least a 10% correction...

- kisa

[arbman]

So now for the comparison, I posted this before;



Here the speculative (NA.HY) is at the levels consistent with the March 2005 top. Actually the market should've been already correcting. This is definitely not May 2006 where the junk yields barely touched 4% at the end of the correction, apparently it was very bullish at the lows.

So, a break here will propel the junk spreads above 5% and add to this the stretched market structure. If this market was not stretched, it would not sell the earnings. The more they sell these news, the more the spreads will widen. I actually think that after the first round of selling, if the market does not give a big break, it will in the second round since the spreads will be much higher...

This is bearish.

- kisa


PS. this is what ogm was mentioning, that there was no market for these bonds or no buyers, so the spreads are very likely to rapidly widen. I mentioned about the rising spreads a couple times last month...

[arbman]

I just felt like I must add these to be fair to the bulls. So far, the market tried to shake this whole junk spreads thing off, meaning a correction was already done by the March decline and a consolidation since early June and the spreads should go lower or priced in (even if they don't go lower). However, the market rallied with a lot of issues finding stiff resistance and the few large cap leaders *with excellent credit* have reached to the extremes. Now, some of them are getting sold on the earnings. Not because they are bad because they are overvalued. It is hard to start a bear market from here without a systematic increase in the spreads of the investment grade corporate bonds as well. So anything will be probably a correction for now and in fact, any rally will be probably only a large cap rally unless the Fed lowers the rates. But any further rally with this kind of deterioration in the spreads will probably trigger a crash at some point before the year is out... So, a correction or consolidation is the most likely outcome, let's see whether the market will stay rational! - kisa

Edited by kisacik, 19 July 2007 - 02:10 AM.