RE: [CANSLIM] Credit Spreads

From: Rakesh Sanghvi <rakeshs@novasoftinfo.com>
Subject: RE: [CANSLIM] Credit Spreads
Date: Sun, 14 Jan 2001 11:39:52 -0500

Next Article (by Subject): [CANSLIM] DGO List "Tom Worley"
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"Another Reason for Cheer: enhanced credit spreads.=20

The difference in yields between corporate and government bonds is an
oft-used gauge of market sentiment. If corporate-debt securities yield
significantly higher interest than safe-harbor US government issues, it
sends a signal that investors are uncomfortable with the current =
prospects
for earnings.=20

The credit spread widened consistently throughout 2000, for example, as =
the
prospects for many companies (especially those in technology-related
sectors) appeared blas=E9.=20

Credit spreads seemed to turn the corner in the last few days of =
December,
and have improved markedly so far this month. This signals that =
investors
have become increasingly confident that the reduction in corporate =
earnings
is mainly seen through the rear mirror.=20

Most of this sentiment change, of course, is due to the Fed's newfound
willingness to cut interest rates.=20

Thicker Spreads Taste Better to Traders
Why is improving credit spreads so important to stock traders? Most
short-term trading systems depend on price momentum (which is the =
tendency
for stocks on the move to continue higher) for profitability. But in =
order
for momentum to generate acceptable returns, economic growth must be =
strong
enough to support higher stock prices=20

The economic indicator most commonly associated with momentum is a =
narrowing
credit spread, since it signals the increased comfort of investors to =
set
aside less risky government bonds in favor of more risky corporate =
debt.=20

The relationship between narrowing credit spreads and stock-price =
momentum
is well-documented, with several studies confirming that you can't have =
the
latter without the former.=20

We will closely monitor the difference between government and =
corporate-debt
securities. If credit spreads continue improving, traders would do well =
to
dust off their trading systems from two years ago in the search for =
next hot
momentum stock. "

- --Ben Warwick

Thought you folks might find this interesting.  Have a great weekend!



- -----Original Message-----
From: Tom Worley
To: CANSLIM
Sent: 1/14/01 10:58 AM
Subject: [CANSLIM] New Highs - NYSE

Anyone using the raw statistics of new highs on the NYSE should
be careful in the application.  I have seen in the past several
weeks an unusually high number of closed end funds (esp tax free,
but covering most every sector) showing up on this list,
distorting the overall numbers.

Tom Worley
stkguru@netside.net
ICQ # 5568838




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