Markets Only Do This When Conditions Are Getting Worse

• Markets Only Do This When Conditions Are Getting Worse
  by Christine Hughes, Chief Investment Strategist, OtterWood Capital,
  http://wolfstreet.com/  
  Is the rally the real deal? Watch the credit markets.
  Since last Thursday’s intra-day low, the S&P rallied +6.6% in four days with the former laggards and most heavily shorted stocks leading the charge. This action is very typical of a bear market rally and should be viewed with skepticism. A great example of a laggard leading is Freeport McMoRan (FCX) which rallied +63% in four days before giving some back. Even with that huge surge, this stock is still down -66% the past year.
  –
  Given what was becoming a large short position in the market (see bottom of chart below), there has been what we call a “squaring of positions” the past week, driving global markets higher. Shorts have begun to cover which forces buyers into the market when they would really rather not be buyers.
  –
  If you want to know if a rally is the real deal, you must watch credit markets as credit leads equities – always. By looking at investment grade spreads below(top of post), credit has actually deteriorated during this rally, the opposite of what you’d want to see. When spreads widen out (line on chart goes up) this means the market is demanding a higher rate of interest for riskier corporate bonds vs governments. Markets only do this when conditions are getting worse/tighter. This line is going in the wrong direction.
  –
  read more.

end