Don’t believe anyone who claims he can predict when the market peaks. In fact, better just flush this person down the toilet tube. In December 2000 the record number of analysts predicted the market to run even higher in 2001. It did not.
However, this time is different. Oh, I forget to tell – especially avoid anyone who says “this time is different”. That’s what all pundits were telling about Nasdaq in 2000. But the history never repeats itself, it just rhymes. This time is different!
We all know that the market runs on cheap credit. As long as junk bonds yield less than junk stocks it makes sense to borrow to the eyeballs and buy stocks. That’s what the market is doing every day.
So all we need to do is to watch the credit spreads, especially spreads for questionable quality issues. As we watch ABX.HE indexes every day anyway, it’s easy to use the same markit.com site and watch those spreads:
This is CDX.NA.HY, the credit default swap for a pool of junk bonds, including Ford, GM, KB Home, Lucent, Novastar and stuff like that.
I’m not a pro, but I’m 90% sure that this chart will give us a timely and accurate warning on the time when the perceived risk of defaults in the junk bond market will jump. And that will indicate the timing when all those leveraged buyouts will wane in dust.
Looking at this chart, it’s probably not a peak yet, but we shall see…