Of all things related to the stock market, the Dow is probably the most widely recognized and for that matter widely understood. But in this environment of crisis it might not be the best thing to watch.
Instead you might want to keep an eye on Libor/OIS spreads which are the difference between the rate banks charge for dollar loans relative to the overnight index swap rate.
As the spread narrows we see increased willingness among banks to lend. And when the spread increases, the exact opposite is true. Banks become less inclined to lend.
According to Mike Darda, chief economist at MKM Partners, the “credit market looks as bad as it ever looked” and spreads are at record highs. In fact, the 2-year swap spread is above 160 bps. That’s a level not seen in 20 years.”
As you can probably guess Darda thinks the credit markets are a better leading indicator than the stock market.
As a result he expects equities to come under increased stress in the near future. “I’d rather miss a little but of the stock market rally and see the credit market recover on a sustained basis,” he says.
If you have a long term horizon Darda told our producers, “stick to defensive groups like consumer staples or health care.” The credit markets are facing unprecedented turmoil.
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Trader disclosure: On Sept 25, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Macke Owns (MSFT), (WMT); Adami Owns (AGU), (BTU), (C), (GS), (MSFT), (NUE), (INTC); Finerman Owns (GS); Finerman's Firm Owns (MSFT), (NOK), (WM), (DELL), (PM); Finerman's Firm Is Short (IYR), (IJR), (MDY), (SPY), (IWM), (COF); Najarian Owns (NOK); Najarian Owns (AAPL) And (AAPL) Puts; Najarian Owns (BBBY) Put Spread; Najarian Owns (FCX) Call Spread; Najarian Owns (GS) Call Spread; Najarian Owns (MS) And Is Short (MS) Calls; Najarian Owns (RIMM) Call Spread; Najarian Owns (WB) Put Spread; Najarian Owns (XLF) Call Spread
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