As we’ve previously described the primary differentiating factor between this sell-off and every sell-off since March 2009 has been the action in the credit markets. For the first time in over year we are seeing substantial deterioration across credit markets. This has been notable in IG credit. Spreads have started blowing out again as the sovereign debt fears raise memories of Lehman Brothers.
The action in yesterday’s market was notable due to the strong technical movement we saw in spreads. The 50 day moving average moving upward crossed the 200 day moving average moving downward. In a typical market this would be known as a “golden cross”, but as widening spreads are a negative indicator this is actually an inverse “death cross”. It sounds very phony as most technical analysis chart patterns do, but this is one that is worth noting. The crossing of the moving averages is a very rare event and generally indicates the beginning of a very strong directional trend. We have noted similar patterns in several markets over the last few years including the golden cross in the S&P 500 in June 2009 at S&P 900 and the death cross in Chinese equities just prior to their recent 20% decline.
From a purely simplistic technical perspective IG credit’s death cross is forecasting more difficult days ahead in the credit markets and that is certain to coincide with more difficulty in the equity markets. Investors would be wise to take note.
(Chart Courtesy of CDR)
Source: Tim Backshall at CDR
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.