In the morning before the opening bell, if you’re looking for a read on the tone in the market, the pros say this works surprisingly well.
“Look at the European credit market,” explains pro trader Joe Terranova. “Specifically watch the moves in yield in Spain’s 2 year note and 5 year note .”When the market is feeling better, yields on the bonds of Spain fall. “especially the 2-year,” notes the pro.
“That’s the model to follow.”
The model worked particularly well on Friday, when there was a 60 bps decline in the yield in the Spanish 2-year bond while the price advanced sharply. (Don't forget, yield and price are inversely related.) That's a sizable move.
In the US the Dow surged by triple digits. That tells you all you need to know, right there.
In case you’re wondering why the credit markets of Europe and especially Spain are a somewhat leading indicators for the US stock market – it’s because the Street is hyper-focused on events overseas.
A drop in yields signals that investors are willing to pay more for bonds. That sends the price higher.In turn, that is considered a vote of confidence – or at least relative confidence – in the sovereign debt of the nation that has issued the bond.Page 1 of 3 | Next Page