Fundamental Thoughts on the Credit Markets support Solwold's technical analysis

See the end of this post for the conculsion if you don't want to read how I construct my credit market index.

I am going to start posting the results of my weekly look at the credit markets on Fridays or Mondays. It is an index I created a few months back to look at the health of the credit markets. It looks at 58 datapoints, some of which happen weekly, some monthly and some quarterly. It is broken down as 28% RISK, 18% RETURN, 30% CONSUMER HEALTH, 18% BUSINESS HEALTH and 6% INFLATION. The thinking goes risk/return is the leading indicator for overall health of the markets so it carries 46% of the index or as much as consumer/business consumption ability of 48%. 60% of the risk/return weight is in risk given that the market is focussed so much on risk right now and will be for some time and 60% of the consumer/business health is weight is in consumer given the larger importance of consumer on consumption. The remaining 6% is inflation with deflation a negative as it shows policy steps are not working as intended. The index is a weighted average result of these 58 datapoints based on 3, 1, 0, -1 and -3 or incrementally getting much better, incrementally getting better, no change, incrementally getting worse and incrementally getting much worse. It is not based on levels or vs. expectations rather the second derivative move in the underlying datapoint.

Net, net the index has been positive for the past 5 weeks meaning things are getting better vs. getting worse. That compares to only 2 positive results in the prior 14 weeks! So even though it feels really bad out there things like issuance of debt, terms of that debt, the Ted Spread, Libor/OIS Spread, VIX, Yield Curve, trading of derivatives on the CME, $ to Yen, $ to Euro, Returns in China, Brazil and South Korea, performance of early cycle stocks vs. late cycle and vs. defensive stocks, consumer confidence, all the housing stats (affordability, mortgage rates, mortgage applications, new and existing home sales and supply & Freddie Mac Delinquencies), gas prices are all getting incrementally better. Unless we start to see these metrics crater and move the other way again heading to where we were post Lehman I don't think that we re-test cycle lows. That being said as you have seen from my prior posts we are definitely going lower from here over the short term.