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Corporate Bonds, Derivatives, and How They Wag the Equity Markets


To more accurately guess the primary direction of equity markets, there are better places to look to than stocks themselves.


So, to sum up how I use the aforementioned tools to gauge which way equities may be heading:
  • First, I look at the health of the corporate bond market through the lenses of new issuance, yields, and secondary market trading.
  • Second, I keep an eye on my areas of concern, China and Europe, by tracking sovereign bonds and CDS spreads.
  • Third, I monitor whether the China/EU problems (or anything else that may creep up abroad or domestically) are spilling into our financial system, and are widening the spreads on CDS of large US financials, as well as broad non-financial CDS indices.
  • Lastly, I want to make sure that our financial System (with the capital S) is not coming under stress. For that, I track US CDS and two-year swap rates.
Taking a snapshot of all of the above, I would conclude that there currently are marginally serious problems in Europe and in China, but these problems remain localized. Our financial institutions are perceived (remember, in finance perception is 90% of reality) to be in decent shape, and their post-crisis lingering problems are of no consequence to corporate bond buyers, which seemingly can't find enough bonds for all the (leveraged) buying power they have. Within this backdrop, equities always run the risk of hitting earnings or headlines related air-pockets, but ultimately the drops are likely to be backstopped by shareholders' friendly actions funded by ongoing sales of corporate debt.

Editor's Note: At Minyanville we often argue that markets and stocks are driven by four primary attributes: the fundamentals, the technicals, the structural, and psychology. In this weekly piece, trader Fil Zucchi will attempt to digest these four measures to come to actionable recommendations, but with a couple of twists: Rather than relying on standard technical analysis, he will examine the technicals through the lenses of "DeMark" indicators. And rather than highlighting straight entry and exit points for stocks, he will use options to gain long / short exposure, control risk, and generate cash flow. Investors should note: This column will be written 1-2 days prior to publication, so by the time it appears the prices of the securities mentioned may have changed.
Positions in SPX
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