Bank of America's US High Yield Option-Adjusted Spread is currently at its lowest level in 17.5 years.
Here’s the chart:
(right-click and open image in new tab to zoom in)
Let's break down what it shows:
The black line is the BofA’s US High Yield Option-Adjusted Spread.
The red line is the 40-week moving average of the High Yield Spread.
The blue line is the S&P 500 index price.
The gray shading highlights when the high yield spread 40-week average is trending lower.
The Takeaway: Let me explain this data more clearly…
A widening in high-yield spreads (the black line moving higher) typically indicates a risk-off environment. This suggests that investors are becoming more risk-averse and that the economy may be facing challenges. Conversely, a tightening in high-yield spreads (the black line moving lower) indicates the opposite.
If there had been meaningful stress in the stock market, it would have shown up in the credit market, and we would have seen a move higher in the BofA's High Yield Spread, but that just didn't happen.
In fact, we saw the opposite of that…
The High Yield Spread moved lower to its lowest level in 17.5 years.
So, with no signs of stress showing up in the credit market, a mild pullback seems to be the best the bears could achieve for now.
Before I go, I will leave you with one of my favorite quotes, which I think is appropriate given the recent changes in the market environment we have seen lately.
“I can't change the direction of the wind, but I can adjust my sails to always reach my destination.” — Jimmy Dean.
Grant Hawkridge | Chief Aussie Operator, All Star Charts
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