Here’s the incredibly strong signal for stocks coming from the corporate bond market

Is It A Fake Dawn In The Stock Market Or Is There Something Real? The S&P 500 never lost ground the following year, when rising volume was at least 85% of volume on two days out of three and hit a 52-week low, according to Jason Goepfert, founder of Sundial Capital Research. This has happened 13 times.

Here’s another: The S&P 500 SPX
closed higher on Wednesday for the first time since March after gaining at least 2% in one day. You can now buy the dip without being automatically and immediately penalized.

But our call of the day examines the connection between corporate bonds and equity markets. Spreads on both investment grade and riskier high yield bonds have tightened rapidly over the past three weeks.

Analysts at Bespoke Investment Group have examined the history of such spread compression, although it’s not a long line given that the popular credit default swap indices were only invented this century.

Tailor-made investment group

The signal is incredibly strong on the junk bond side. In the nine previous periods when CDX HY spreads fell at least 75 basis points in three weeks, the S&P 500 rose over the next week, six months and next year averaging a 22% return over the next year. “It’s awfully hard to find a market signal that looks much better over the long term,” Bespoke analysts said.

It’s less strong for investment grade credit but still positive. If the CDX-IG spread has fallen at least 15 basis points over three weeks, and it has done so 14 times since 2005, the S&P 500 has risen on 12 of those occasions over the course of a year, with an average gain of 13%.

A word of warning however. At current prices, junk bonds are JNK
are not pricing in a recession, according to BCA Research. The index is pricing in a default rate of 6.65%. “Given that default rates typically exceed 8% during recessions, there is scope for spreads to widen further as recession risks intensify,” BCA analysts said.

The Buzz

Tesla TSLA
reported Result above expectations and managed to turn positive cash flow for the quarter by selling 75% of its Bitcoin BTCUSD
holdings, at a loss. The electric vehicle maker also said it plans to start long-delayed Cybertruck deliveries in the middle of next year. Ford F,
will meanwhile cut thousands of jobs to refocus on electric vehicles, The Wall Street Journal and Bloomberg News reported.

Aluminum producer Alcoa AA
and casino operator Las Vegas Sands. I AGAINST
rebounded after stronger than forecast results. United Airlines UAL
missed profits and reduced its capacity plans for the next year. Cruise operator Carnival CCL
plunged 12% after selling $1 billion worth of shares.

Amazon AMZN
said it is making a $3.9 billion acquisition of 1Life Healthcare ONEM,
the owner of family doctor One Medical.

The European central bank made its first rate hike in a decade up half a point, somewhat surprising the market as it also approved the so-called Transmission Protection Instrument to limit eurozone bond yield spreads.

US jobless claims rose 7k to 251k as the Philadelphia Fed manufacturing index dipped deeper into negative territory at -12.3.

Italy’s Prime Minister Mario Draghi resigned, plunging the eurozone’s third-largest economy into political turmoil send Italian bond yields higher.

Russia’s Gazprom to supply gas to Germany again through the Nord Stream 1 pipeline at the same 40% rate as before the planned maintenance period. Russia also said it plans to hold annexation votes in Ukrainian regions by September 15. Ukraine devalued its currency, the hryvnia, by 25% against the US dollar.

The market

US Stock Futures ES00

NQ00
indicated a slow start. Crude Oil Futures CL
fell, losing about $4 a barrel. The yield of the 10-year Treasury BX:TMUBMUSD10Y
declined after the latest US economic data.

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