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Unexpected and Surprisingly Reliable Market Barometer

Friday, 3 Aug 2012 | 2:05 PM ET

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.

And any sign that confidence in Europe has increased is typically greeted with enthusiasm by bulls in the US.

Posted by CNBC's Lee Brodie

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Trader disclosure: On August 3, 2012, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Mike Murphy is long SBUX; Steve Weiss is long JPM; Steve Weiss is long CAT; Steve Weiss is long WLP; Steve Weiss is long HAIN; Steve Weiss is long QCOM; Steve Weiss is long HK; Steve Weiss is short AKS; Joe Terranova is long MINI S&P FUTURES; Joe Terranova is long VRTS; Joe Terranova is long MCD; Joe Terranova is long USB; Joe Terranova is long GS; Joe Terranova is long JPM; Joe Terranova is long YHOO; Joe Terranova is long SBUX; Joe Terranova is long WFM; Joe Terranova is long AAPL; Joe Terranova is long WMC; Joe Terranova is long NXPI; Steve Grasso is long ASTM; Steve Grasso is long BA; Steve Grasso is long D; Steve Grasso is long FRO; Steve Grasso is long LNG; Steve Grasso is long MHY; Steve Grasso is long MO; Steve Grasso is long NVIV; Steve Grasso is long PFE; Steve Grasso is long S; Steve Grasso is long XLU

For Jeff Kilburg
Nothing to Disclose



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