Saul Doctor (that's his name), European Credit Derivatives Strategy, JP Morgan, has warned that technical signals have turned bearish in the credit markets. 3 indicators that he uses have all turned negative. The RSI and "House of Cards" Index turned negative last week, and on Friday, the third of their indicator, the "Momentum" Index turned as well.
Essentially, these indicators have been designed to pick the turning points in the credit sentiments, and past back-testings have proven the effectiveness of these indicators.
Therefore, if past relationships hold, rallies in equity markets may be close to an end as widening credit spreads signal market's diminishing risk appetite. We saw this trend in 2008 as well, as the widening of credits led the declines in stock markets.
So, is Doctor's prescription too conservative and premature? Time will tell, but after a 50% rally from their lows, Equities may be due for a pause.
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