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What Is the Credit Default Swaps Market Saying About Stocks?
Stocks could go sideways for a while.
Fil Zucchi    

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

If one agrees with my thesis that activity in credit default swaps (CDS) has a causal as well as corollary influence on stocks, it is fair to say that the credit bears' latest foray to shake things up has been crushed. 

As I write this, my custom index of large US financials' CDS has fallen below the low end of a range that has lasted several weeks and is making new post-crisis lows. The same goes for the sovereign credit default swaps of Italy and Spain. US credit default swaps are down another 1 bp to 17.5 bps. 

Even China-related credit default swaps -- where credit issues seem to get widespread attention on a daily basis -- are once again lower.

So does that mean that the stock market is ready to break out of the recent trading range?

Maybe. 

As I explained in the article referenced above, the tightening of CDS spreads tends to have its biggest short-term impact when it is the results of bears covering the bets laid out during a bear raid. That's because the most efficient way to cover those bets is to go long on equities and equity futures. Once the CDS "short squeeze" is over, that artificial buying pressure fades.

A continued longer-term rise in equities depends mostly on corporations buying back their own stock (much of it funded by the sale of corporate bonds), with the proceeds being rolled into the broader market. You can look here for the data behind this assertion (subscription required).

With earnings season less than two weeks away and a fair amount of pessimism surrounding what those numbers will look like, it's not clear that companies will be willing to crank up the buyback machines just yet. There are also regulatory restrictions on buybacks around earnings announcements.

Don't be surprised if stocks keep churning within the recent range for quite a while longer. That said, with March's $170 billion-plus worth of corporate bond issues highlighting the white-hot state of that market, the chances are far higher than not that eventually, companies will walk their stocks up, market be damned.

Twitter: @FZucchi

Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
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No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
What Is the Credit Default Swaps Market Saying About Stocks?
Stocks could go sideways for a while.
Fil Zucchi    

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

If one agrees with my thesis that activity in credit default swaps (CDS) has a causal as well as corollary influence on stocks, it is fair to say that the credit bears' latest foray to shake things up has been crushed. 

As I write this, my custom index of large US financials' CDS has fallen below the low end of a range that has lasted several weeks and is making new post-crisis lows. The same goes for the sovereign credit default swaps of Italy and Spain. US credit default swaps are down another 1 bp to 17.5 bps. 

Even China-related credit default swaps -- where credit issues seem to get widespread attention on a daily basis -- are once again lower.

So does that mean that the stock market is ready to break out of the recent trading range?

Maybe. 

As I explained in the article referenced above, the tightening of CDS spreads tends to have its biggest short-term impact when it is the results of bears covering the bets laid out during a bear raid. That's because the most efficient way to cover those bets is to go long on equities and equity futures. Once the CDS "short squeeze" is over, that artificial buying pressure fades.

A continued longer-term rise in equities depends mostly on corporations buying back their own stock (much of it funded by the sale of corporate bonds), with the proceeds being rolled into the broader market. You can look here for the data behind this assertion (subscription required).

With earnings season less than two weeks away and a fair amount of pessimism surrounding what those numbers will look like, it's not clear that companies will be willing to crank up the buyback machines just yet. There are also regulatory restrictions on buybacks around earnings announcements.

Don't be surprised if stocks keep churning within the recent range for quite a while longer. That said, with March's $170 billion-plus worth of corporate bond issues highlighting the white-hot state of that market, the chances are far higher than not that eventually, companies will walk their stocks up, market be damned.

Twitter: @FZucchi

Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
What Is the Credit Default Swaps Market Saying About Stocks?
Stocks could go sideways for a while.
Fil Zucchi    

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

If one agrees with my thesis that activity in credit default swaps (CDS) has a causal as well as corollary influence on stocks, it is fair to say that the credit bears' latest foray to shake things up has been crushed. 

As I write this, my custom index of large US financials' CDS has fallen below the low end of a range that has lasted several weeks and is making new post-crisis lows. The same goes for the sovereign credit default swaps of Italy and Spain. US credit default swaps are down another 1 bp to 17.5 bps. 

Even China-related credit default swaps -- where credit issues seem to get widespread attention on a daily basis -- are once again lower.

So does that mean that the stock market is ready to break out of the recent trading range?

Maybe. 

As I explained in the article referenced above, the tightening of CDS spreads tends to have its biggest short-term impact when it is the results of bears covering the bets laid out during a bear raid. That's because the most efficient way to cover those bets is to go long on equities and equity futures. Once the CDS "short squeeze" is over, that artificial buying pressure fades.

A continued longer-term rise in equities depends mostly on corporations buying back their own stock (much of it funded by the sale of corporate bonds), with the proceeds being rolled into the broader market. You can look here for the data behind this assertion (subscription required).

With earnings season less than two weeks away and a fair amount of pessimism surrounding what those numbers will look like, it's not clear that companies will be willing to crank up the buyback machines just yet. There are also regulatory restrictions on buybacks around earnings announcements.

Don't be surprised if stocks keep churning within the recent range for quite a while longer. That said, with March's $170 billion-plus worth of corporate bond issues highlighting the white-hot state of that market, the chances are far higher than not that eventually, companies will walk their stocks up, market be damned.

Twitter: @FZucchi

Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
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