Some cite falling junk spreads as a reason to sell stocks. While junk spreads represents a component of a broader message, it's not the message of the market. The message of the market— the movement of capital and money across global markets—is significantly deeper than any single intermarket relationship. Anyone trying to time the markets based on a single 'indicator' will fail over time.
Junk spreads which are often proportional (move in the same direction) to stocks have been falling since January 2014 (see chart, below). Anyone following junk spreads as a proxy for the message of the market has been short and losing money since January. Clearly, something other than junk spreads is driving stocks prices.
That something includes but is not limited to the following:
- Domestic and international money flows. These flows are defined by long-term cycles and trends and the movement of money within leveraged markets.
- Flight of capital from areas of high uncertainty to areas of low uncertainty. Uncertain can be driven by economic, social, and/or political trends.
Headline: Want to get back into stocks? Check junk spreads first
NEW YORK (Reuters) - A positive vibe returned to the U.S. stock market Friday, leaving some to wonder if, after two weeks of losses, the latest selloff scare was over. The best clues may come from what happens to low-quality corporate bonds.
The most recent decline in the S&P 500 marks the third time in six months that the market has looked wobbly and threatened a significant reversal. Each time, so far, it has bounced back quickly.