No Good News From Corporate Curves

Here's a question to ponder: Do they try to set the land speed record in a place like the Bonneville Salt Flats or on some twisty mountain road like Bolivia's infamous Highway of Death? The answer should be obvious.

Now here's a second question: Should you evaluate a market analysis tool in a smooth trend with few reversals or in a choppy market full of sudden reversals, false breakouts and all sorts of tests? Here the answer is a little less obvious. A short-term mean-reversion system can handle the sideways markets well but will fail you miserably once a trend establishes itself.

However, any system -- trend-following or mean-reverting -- should perform well in a trend change. This dictum applies to fundamental analysis as well: If you fail to get the market's turns, your analysis is worthless.

I say this as a windup to something that has perplexed me twice in the last year. If we go back to last August, the overriding market sentiment was neutral-to-bearish. The feeling was that once the adults returned from their vacations they would put an end to all that silly buying, yes sir, and restore some rationality to an overheated market. When the market continued to march higher with scarcely a downtick for the next six months, the overriding sentiment was bullish-to-even-more-bullish.

Restated, we all failed ourselves. I would like to see a show of hands, backed by account statements, of all those who were massively long in August only to shift to neutral or short in mid-February.

Corporate Bond Signals

Let's return to an analysis from February 2006 on the information contained in corporate bond yield curves. While the mechanics of the analysis are somewhat complex -- who, moi? -- the interpretation is actually pretty straightforward. We can compare corporates and Treasuries on three bases, only two of which will be discussed here. The omitted basis of comparison is credit default swap (CDS) costs, last seen lurking around these parts in June 2006.

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Howard L. Simons is president of Simons Research, a strategist for Bianco Research, a trading consultant and the author of The Dynamic Option Selection System. Under no circumstances does the information in this column represent a recommendation to buy or sell securities. While Simons cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.

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