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Fil Zucchi: Deja Vu All Over Again


Credit continues to lead equities.

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+.

Yesterday on Twitter I suggested that the bounce in stocks was not supported by the credit complex, and that the improvement in the latter simply made the risk of a full blown correction a bit lower.  Today the move in credit derivatives, as well as credit spreads, are entirely consistent with the swoon in equities.

I am keying on a couple of things to get a sense of whether we are on the verge of a tradable correction. From a chart standpoint, a "confirmed" break of the TD Reference Close Down price (see here for a brief DeMark primer); and from a "credit complex" perspective, the 62bps area in the Investment Grade CDX.  If both these levels break, the odds of a correction to S&P500 (SPX) 1950 and then 1915, is moved squarely on the front burner.

All this said, I'd urge Minyans not to confuse the risk of a correction with the end of the world. Yesterday's corporate bond issuance for example was $13.6B - that's not a credit market signaling a crisis.  Furthermore, September total issuance is now likely to exceed the $200B mark, and the secondary trading in these new bonds has been nicely steady.  In the scheme of things, the widening in spreads and credit default swaps is hardly noticeable when compared to other periods in the last five years during which stocks have corrected.

So, what am I looking at to get a sense of when this drop might end?  Aside from the above tells of course, it's time to dust off the 3-month curve of the Volatility Index (VIX). My initial benchmarks are the Aug lows at -1.1 and the January lows at -3.  

In short, a correction, maybe even a deep one, can creep up at any time, but the key structural underpinning of this market - corporate credit - remains as good as ever.

P.S. For more ideas on how to navigate the shorter term moves of the markets, and for more color on how/why the corporate bond market influences stocks, here are past articles that you may find useful.

Corporate Bonds, Derivatives and How They Wag The Equity Markets 8/29/2012
Alphabet Soup Monsters 4/15/2013
VIX Curves rather than single point 6/3/2013
Margin Debt Balances 1/8/14
More Color on Bonds and Stocks 2/19/14 
China Debt Bomb - How To Use CDS 3/28/2014
The Pundits Are Wrong - the Bull Market is Not Over Yet 4/14/2014

Twitter: @FZucchi

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No positions in stocks mentioned.
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