Tuesday, April 14, 2009

US CDS Market Close: Skews News

Spreads were generally tighter in single-name CDS today with tighteners outpacing wideners by over six-to-one. Sentiment appeared positive but is becoming harder to judge recently as technicals remain dominant. Today saw indices significantly underperforming intrinsics with skews being...more

Strategy: Capital Structure Arbitrage - Equities

With banks (banks!) spurring a market rally, equity remains expensive to credit-implied fair value according to our bottom-up analysis. Our top-down credit-equity model points to near parity between the two markets. How long equities will remain expensive is an open question and we continue to look for equities to...more

Trade: Computer Sciences Corp: Technical Difficulties

We consider a trade on Computer Sciences Corp (CSC) today, a name trading near its recent tights. Our directional credit model points to significant deterioration in CSC. We choose a short credit/long equity relative value trade rather than an outright credit position because we like the straddle-like payout...more

Friday, February 06, 2009

US CDS Market Close (Weekly Update)

Spreads were mixed this week with HY continuing to underperform IG and HVOL as the 'up-in-quality' trade remains amid the Stimulus and Geithner uncertainty. Intrinsics behaved in the exact opposite manner as HY and XO single-names outperformed IG and HVOL single-names as skews increased in every index (IG, HVOL, and ExHVOL all extremely rich while XO and HY remain very cheap).

Tighteners outpaced wideners by just under two-to-one on the week while low beta credits outperformed higher beta credits as TMT names were significantly weaker while FINLs hung steady as ENRG outperformed dramatically.
Once again, CDX index values behaved very differently from the moves in our non-traded-biased indices which showed much less tightening this week in IG relative to HY credits this week.

Dispersion rose significantly with the extreme moves in spreads at the tails really reflecting the illiquidity as well as sentiment. We note that the LQD-TLH differential is trading significantly rich to IG credits and we suggest shorting the equity differential (Buy TLH and Short LQD) with a target of over $16 (from around $13 currently).

The sell-off in Treasuries seems to signal a reality that inflationary pressures from printing presses are here to stay (confirmed once again by the significant rise in USA protection costs).

Market Summary(WoW)
Spreads were mixed in the US today with IG tighter, HVOL improving, ExHVOL better, XO wider, and HY selling off. Indices generally outperformed intrinsics with skews widening in general as IG's skew decompressed as the index beat intrinsics, HVOL outperformed but widened the skew, ExHVOL outperformed pushing the skew wider, XO underperformed but widened the skew, and HY's skew widened as it underperformed.

12% of names in IG moved more than their historical vol would imply as higher vol names underperformed lower vol names by -0.1% to -1.73%. IG's vol is around 10.96% per 5 day period, which leaves 107 names higher vol and 18 lower vol than the index.

The names having the largest impact on IG are Constellation Energy Group Inc. (-110bps) pushing IG 0.89bps tighter, and Textron Financial Corp (+555.45bps) adding 2.1bps to IG. HVOL is more sensitive with International Lease Finance Corp. pushing it 1.63bps tighter, and Dow Chemical Company contributing 3.91bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Constellation Energy Group Inc. (-110bps) pushing the index 1.12bps tighter, and Textron Financial Corp (+555.45bps) adding 2.64bps to ExHVOL.

The price of investment grade credit rose 0.26% to around 98.28% of par, while the price of high yield credits fell 0.59% to around 73.75% of par. Volatility (VIX) is down -1.47pts to 43.37%, with 10Y TSY selling off (yield rising) 14.6bps to 2.99% and the 2s10s curve steepened by 9.7bps, as the cost of protection on US Treasuries rose 14.4bps to 82.4bps. 2Y swap spreads tightened 8.8bps to 61bps, as the TED Spread widened by 0.9bps to 0.97%.

The Dollar weakened with DXY falling 0.76% to 85.346, Oil falling $1.61 to $40.07 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 2.13% this week (a 4.62% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $16.4 to $911.45 as the S&P rallies (845.5 2.8%) underperforming IG11 credits (193bps -3.02%) while IG, which opened the week at 203.5bps, outperforms HY credits. IG10 and XOver10 are -0.5bps and -63bps respectively while ITRX10 is -11.5bps to 148.5bps.

The majority of credit curves steepened as the vol term structure steepened with VIX/VIXV decreasing implying a more bearish/more volatile short-term outlook (normally indicative of short-term spread decompression expectations).

Dispersion rose +69bps in IG11. Broad market dispersion is a little greater than historically expected given current spread levels, indicating more general discrimination among credits than on average over the past year, and dispersion increasing more than expected today indicating a less systemic and more idiosyncratic spread widening/tightening at the tails. 76% of IG credits are shifting by more than 3bps and 66% of the CDX11 universe are also shifting significantly (less than the 5 day average of 68%).

The number of names wider than the index increased by 1 to 55 as the week's range fell to 19.75bps (one-month average 30.25bps), between low bid at 188.25 and high offer at 208 and higher beta credits (0.74%) underperformed lower beta credits (-1.61%). In IG, wideners were outpaced by tighteners by around 3-to-2, with 47 credits wider.

By sector, CONS saw 38% names wider, ENRGs 7% names wider, FINLs 38% names wider, INDUs 24% names wider, and TMTs 74% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG11 exFINLs) with the former trading at 156.88bps and the latter at 204.72bps.

Cross Market, we are seeing the HY-XOver spread decompressing to 388.2bps from 266.81bps, and remains above the short-term average of 312.41bps, with the HY/XOver ratio rising to 1.38x, above its 5-day mean of 1.3x. The IG-Main spread decompressed to 44.5bps from 39bps, and remains above the short-term average of 40.08bps, with the IG/Main ratio rising to 1.3x, above its 5-day mean of 1.25x.

In the US, non-financials underperformed financials as IG11 ExFINLs are wider by 2bps to 204.7bps, with 58 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 5.68bps to 171.37bps, with Finance names (worst) wider by 59.08bps to 918.07bps, Brokers (best) tighter by 24.08bps to 219.25bps, and Banks tighter by 10.5bps to 185.43bps. Monolines are trading wider on average by 105.92bps (4.45%) to 2025.52bps.

In IG11, FINLs underperformed non-FINLs (1.1% wider to 0.99% wider respectively), with the former (IG11 FINLs) wider by 4.4bps to 400.4bps, with 12 of the 21 names tighter.
The IG CDS market (as per CDX) is cheap to the LQD-TLH-implied valuation of investment grade credit (184.06bps), with the bond ETFs underperforming the IG CDS market by around 6.75bps.

In Europe, ITRX Main ex-FINLs (outperforming FINLs) rallied 12.12bps to 156.88bps (with ITRX FINLs -trending tighter- better by 9 to 115bps) and is currently trading tight to its week's range at 0%, between 176.39 to 156.88bps, and is trending tighter. Main LoVOL (trend tighter) is currently trading tight to its week's range at -0.02%, between 95.29 to 84.87bps. ExHVOL underperformed LoVOL as the differential decompressed to 26.97bps from 24.61bps, but remains above the short-term average of 22.95bps. The Main exFINLS to IG ExHVOL differential compressed to 45.04bps from 51.16bps, but remains below the short-term average of 53.92bps.

The Emerging Market index is 0.2% riskier (1.6bps wider) to 668bps. EM10 (No Trend) is currently trading tight to its week's range at 5.3%, between 695.5 to 666.5bps. The HY-EM spread decompressed to 734.16bps from 677.34bps, and remains above the short-term average of 697.55bps, with the HY/EM ratio rising to 2.1x, above its 5-day mean of 2.03x.

Index/Intrinsics Changes (WoW)
CDR LQD 50 NAIG091 -7.23bps to 240.48 (17 wider - 31 tighter <> 29 steeper - 21 flatter).
CDX11 IG -6bps to 193 ($0.26 to $98.28) (FV +2.36bps to 233.52) (47 wider - 70 tighter <> 74 steeper - 51 flatter) - Trend Tighter.
CDX11 HVOL -22bps to 450 (FV +11.45bps to 480.62) (14 wider - 16 tighter <> 20 steeper - 10 flatter) - Trend Tighter.
CDX11 ExHVOL -0.95bps to 111.84 (FV +4.65bps to 170.42) (33 wider - 62 tighter <> 41 steeper - 54 flatter).
CDX11 XO +23.3bps to 600 (FV -27.13bps to 525.94) (8 wider - 25 tighter <> 26 steeper - 9 flatter) - Trend Wider.
CDX11 HY (30% recovery) Px $-1.31 to $72.88 / +58.4bps to 1402.2 (FV -66.89bps to 1048.88) (31 wider - 67 tighter <> 87 steeper - 12 flatter) - Trend Wider.
LCDX10 (55% recovery) Px $-1.27 to $76.38 / +81bps to 1293.78 - Trend Wider.
MCDX11 -15bps to 195bps. - Trend Tighter.
CDR Counterparty Risk Index fell 5.68bps (-3.21%) to 171.37bps (7 wider - 7 tighter).
DXY weakened 0.76% to 85.35.
Oil fell $1.6 to $40.08.
Gold fell $16.2 to $911.65.
VIX fell 1.47pts to 43.37%.
10Y US Treasury yields rose 14.4bps to 2.99%.
S&P500 Futures gained 2.8% to 845.5.

IG Sector Moves and Betas (WoW)
In IG11, TMT (the worst sector this week) under-performed IG, moving (on average) 13.6bps (5.63%) wider to an average of 270bps. FINL (the second weakest sector on the week) under-performed IG, moving (on average) 43.6bps (0.96%) wider to an average of 736.1bps. INDU (the median sector) under-performed IG, moving (on average) 21bps (0.3%) wider to an average of 268.6bps. CONS (the second best sector of the week) under-performed IG, moving (on average) 0.6bps (0.03%) wider to an average of 222.5bps. ENRG (the best sector this week) out-performed IG, moving (on average) 22.6bps (12.67%) tighter to an average of 126.8bps.

From the top-down, index capital structure changes were both improving with credit outpacing equity. The sectors were mixed with CONS (equity outperformed credit as they both strengthened), ENRG (improving with credit outpacing equity), FINL (divergent as equity beats credit), INDU (divergent as equity beats credit), and TMT (divergent as equity beats credit).

CDX-based regression betas indicate that CONS (-0.02x) have the highest beta and FINL (-0.1x) the lowest, with TMT (-0.04x), INDU (-0.05x), and ENRG (-0.07x) in between. Comparing the regression betas to current level betas we see that ENRG (1.01x rich) is the richest sector, while FINL (-2.09x cheap) is the cheapest, with CONS (0.44x rich), INDU (0.25x rich), and TMT (0.23x rich) trading more in line.

Focusing on intra-sector movements within IG, we notice dispersion increasing the most in INDU which shifted 33.43% to 318.4bps, and the least in ENRG which shifted -20.79% to 87.5bps.

Index Internals(WoW)
Within the 240 name CDX Index Universe, sentiment is more bullish, with 81 (32%) wideners to 149 (60%) tighteners and 173 (69%) steepeners to 68 (27%) flatteners (1.8 tighteners for every widener). Among this universe, there are 12 credits with a bullish trend, and 7 with a bearish trend (based on the previous five days trading action). The market's general sentiment is evident as we note that 24 credits are at the widest in their 5-day range currently, and 105 are at their tightest.

58 credits are in the Top Decile (Spread-wise) of their 52-week range, while 2 credits are in the Bottom Decile. Furthermore, 21 credits are making new 52-week wides (Spread-wise) while 8 credits are making new 52-week tights. Notably, from the 240 name index universe, there are 46 (~19%) credits that have inverted curves, with an average inversion of 15% of 5Y CDS.

Within the IG universe, dispersion overall has risen 69bps to 571bps, as the wings of the distribution (10-90%) increased more than the centre (25-75%) of the distribution. The distribution shifted non-linearly as the 90th percentile increased the most (72bps /11.94%) to 675bps, and the 75th percentile increased the least (-20bps /-5.67%) to 332.5bps.

Single-Name Movers(WoW)
This week's biggest absolute movers in IG were iStar Financial Inc. (+662.91bps), Textron Financial Corp (+555.45bps), and MBIA Insurance Corporation (+338.77bps) in the wideners, and Constellation Energy Group Inc. (-110bps), International Lease Finance Corp. (-57.93bps), and Simon Property Group, L.P. (-55bps) in the tighteners. The week's biggest percentage movers in IG were Textron Financial Corp (+56.21%), News America Inc (+26.3%), and Dow Chemical Company (+25%) in the wideners, and Constellation Energy Group Inc. (-26.51%), National Rural Utilities Cooperative Finance Corporation (-22.22%), and Valero Energy Corp. (-20%) in the tighteners.

In the more financial-heavy CDR NAIG LQD 50 index, sentiment is mixed with 17 wider to 31 tighter, and 29 steeper to 21 flatter as 43 of the 50 credits have inverted curves. The biggest absolute movers were Financial Security Assurance Inc. (+91.57bps), RR Donnelley & Sons Company (+45bps), and News America Inc (+30.25bps) in the wideners, and Constellation Energy Group Inc. (-110bps), Goldman Sachs Group Inc (-63bps), and Simon Property Group, L.P. (-55bps) in the tighteners. The biggest percentage movers in the CDR NAIG LQD 50 were News America Inc (+26.3%), Merrill Lynch & Co., Inc. (+14.29%), and Computer Sciences Corp. (+12.29%) in the wideners, and Constellation Energy Group Inc. (-26.51%), National Rural Utilities Cooperative Finance Corporation (-22.22%), and Goldman Sachs Group Inc (-20.93%) in the tighteners.

In XO11, the week's biggest percentage movers were Belo Corp (+14.91%), MGM Mirage Inc (+13.68%), and Bombardier Inc. (+10.16%) in the wideners, and Chemtura Corporation (-29.26%), KB Home (-21.3%), and CA, Inc. (-19.57%) in the tighteners. The largest absolute movers in XO11 were MGM Mirage Inc (+274.2bps), Belo Corp (+182.09bps), and Bombardier Inc. (+65bps) in the wideners, and Chemtura Corporation (-2296.65bps), EL Paso Corp (-145bps), and Flextronics International Ltd. (-130.5bps) in the tighteners.

In the names of the HY11 index, amid low single-name liquidity, this week's biggest percentage movers were Harrah's Operating Co Inc (+32.35%), TRW Automotive Inc (+25.97%), and ArvinMeritor Inc (+25.93%) in the wideners, and Abitibi-Consolidated Inc., Clear Channel Communications Inc, and Chemtura Corporation in the tighteners. The largest absolute movers in HY11 were Idearc Inc., Charter Communications Holdings, LLC, and Harrah's Operating Co Inc in the wideners, and Abitibi-Consolidated Inc., Clear Channel Communications Inc, and Station Casinos, Inc. in the tighteners.

The CDR Counterparty Risk Index Series 2 (of brokers and banks) fell -5.63bps (or -3.18%) to 171.42bps. Merrill Lynch & Co., Inc. (25bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst Merrill Lynch & Co., Inc. (14.29%) is the worst (relative) performer. Goldman Sachs Group Inc (-63bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and Goldman Sachs Group Inc (-20.93%) is the best (relative) performer.

The CDR Aussie Index fell -5.26bps (or -1.85%) to 279.22bps. Amcor Limited (31.8bps) is the worst (absolute) performer, whilst Amcor Limited (20.68%) is the worst (relative) performer. RIO Tinto Ltd (-60bps) is the best (absolute) performer, and RIO Tinto Ltd (-8.16%) is the best (relative) performer.

The CDR Asian Index rose 25.45bps (or 3.86%) to 684.51bps. Tata Motors Ltd. (250.9bps) is the worst (absolute) performer, whilst Hitachi Ltd (95.83%) is the worst (relative) performer. Aiful Corporation (-80.6bps) is the best (absolute) performer, and Hutchison Whampoa Ltd (-4.87%) is the best (relative) performer.

CDS Skews and Shorts

With skews near their wides and relative value spreads decompressing, we think there are some important indicators of potential opportunity to re-enter shorts as well as playing for an increased vol environment with cheap puts in credit-land.

We discuss two approaches that provide cheap options on increased stress (they are both European interestingly) and then go on to discuss the index skew in IG and reiterate some notable lead/lag relationships that can be used by investors to better time entries.

Play the Vol
We are somewhat loath to place the big macro bets in this environment as so much rests on the words of so few but it should be clear that our view in general is more bearish than bullish (despite our more RV approach this year). We have been discussing some ideas on finding cheap shorts or cheap vol plays with a number of clients (and in this comment section) and given the outperformance of non-FINLs versus FINLs recently.

We strongly suggest Short ITRX Non-FINLs against Long ITRX FINLs (Sen) as a cheap play on increased volatility. The spread between the two is at its lowest since 12/10 and is almost 40bps tighter than its peak at year-end. FINLs spreads have remained largely flat while non-FINLs have rallied considerably during this period.

The ITRX FINLs consists of 25 major EUR financials with the majority having received either implicit or explicit government guarantees. Add to that, Buffet's investment in SwissRe (signaling private money willing to follow the government into financial debt) and we feel that the cheapness of the spread (at around 40bps) appears like a great cheap play on non-FINLs volatility and further stress in the real economy.

We have seen non-FINLs trade inside of FINLs (around 10/01 post LEH) and we think that puts a pretty decent floor under the spread (and moreover with government support we think the floor is even higher at around 20bps if spreads continue to compress). The FINLs appear to be trading a little wide of sovereigns in general and we suspect that f we see further deterioration in the EU economy, we could see non-FINLs jump back to the 70-80bps range.

Playing this via ITRX Main and ITRX FINLs requires a little finesse on the weighting to ensure that you remove the FINLs exposure from Main and still maintain its overweight so be careful. We note one more confirmation to help this trade and that is that the non-FINLs index trades significantly richer to intrinsics than the FINLs index (providing some 10-20bps of cushion if we see Main skews retrace or converge).

The other play we have been looking at is the ITRX FINLs Sen-Sub decompression. We think that in the mid-50s, getting the long the spread (buying Sub protection and selling Senior protection) seems like a cheap option to us on the uncertainty surrounding the non-majors in the FINLs index (they are not all Deutsche Bank) especially as we see further stress from the 'dislocations' in their basis books and as they become realized. It seems that a modest negative carry is more than covered by the small downside (20bps) and large upside (50-60bps) making this position feel like a cheap put on European financial stress.

Shorts and The Skew
With the IG skew reaching back up to historical wides again (intrinsics cheap to index) we try to address some of the technicals at play and look at ways to play this. The skew is somewhat frustrating and we suspect is being driven by four main themes (among others I am sure).

The first is the unwinds/tear-ups and general cleaning up of CDS-based risk. Between the uncertainty in Stimulus and Geithner's plan, and the 'new CDS' contracts, many of our clients are expressing a will to sit on their hands until the roll. Judging from the DTCC data there is a major reduction in risk in the indices relative to the single-names and particularly among the dealers and we suspect this has led to more index trade tear-ups than single-names. This one is hard to judge as the data is slow to come and is a little tough to judge (especially given the desire for the dealers to hold protection against their bond inventories to try and reduce capital currently).

The second could be related to the big basis losses that many of the dealers have faced. When they put the deals on they obviously buy single-name and buy bonds. The basis blows out huge and they get nervous and sell an index protection overlay hedge on their CDS leg while pushing bonds into banking book (out of trading book). If we start to see the basis narrowing (some forced unwinds of basis trades as well as stability in funding, collateral, cprty risk) then that could again be a trigger for resetting shorts as this would likely push the skew the other way.

The third reason is simply a reflection of more liquidity in the indices versus single-names and a 'bullish' bias to many macro investors currently - selling protection to get long corporate bonds because everyone on CNBC says that is a great deal! (sarcasm).

The last (and potentially largest) reason is likely the knock-on impact from the bespoke unwinds. The last few weeks have seen mezz spreads underperform which signals (in our view) a rise in bespoke unwinds. The unwinds have an implicit skew widening effect as banks buy back single-name protection and sell-back index protection (from the mezz hedge).

We think if you are looking to reset some shorts then tracking any pullback (rally) in mezz (delta-adjusted) as sign of protection-selling pressure easing in single-names. We would also look at the DTCC data breakdown for which sectors seems to be being unwound the largest (Full Terminations) as a way to protect against any potential short squeeze.

Skew Leads Index
We discussed the idea of a one-legged index arb last summer when we noticed that as the index skew rolls over from a peak, it signals a move in the underlying index.

The last four months or so of the IG11 contract (and before that in IG10) we have seen a range from around 0 to -55 for the skew (Index - Intrinsics) and we are considerably nearer the wides of that range today as index covering outpaced single-name. Each time the skew has pushed up to the top of the range and rolled over, we have seen the underlying index widen over the next few days (charts available).

This happened 10/16, 11/27, 1/2, and modestly on 1/28. We are pushing up against those highs again (as discussed above) and we suggest that if we see a turn back down (compression) in the skew then investors should see this as a trigger for buying index protection.

Although we have heard of one or two major dealers offering levels in the index arb package, we feel the upside of our one-legged arb with a tight stop is far greater than the operational and slippage issues involved in a big ticket index arb.

CDS Market Technical Analysis

Equities are getting ahead of spreads in this rally as the midweek highs in equity were broken today while the midweek tights in IG remain safe (so far). Our top-down CSA model sees the S&P slightly cheap (low), CDS modestly rich, and vol a little high, offering little top-down direction.

We have been building a very significant base in IG over the past few weeks and a pattern is appearing the hourly, daily, and weekly charts that makes us more prone to look for upside blowouts (widening) in spreads.

We do not typically publish our thoughts on the technical analysis side of the market but due to client demand (and our view that some of it provides significant benefits in this type of market) we are providing our thoughts below.

Bottom line is that we are trading sideways with some significant support and resistance levels forming as investors sit on their hands for more fundamental reasons. The formation of multiple time frame-based upside (widening) breakout patterns biases us to look for a bearish trade but we discuss entries and stops for longs also.

We also note that the market has historically repeated the same pattern we are seeing now a few times over the past year or two: rally into an expectation of a major government plan and then sell-off after the real plan comes to lights, the levels below might help plan for that.

The charts showing these patterns and our views are available upon request.

Weekly View
Looking technically at weekly bars on IG, we see IG hovering at the lower end of a support trendline from the 05/02 low to 09/12 low, this has provided significant congestion in the last few weeks and has held on every test in the mid 180s levels. This area of congestion is also confirmed by a upside channel trendline from the 08/03/07 wides and 10/19/07 tights.

Weekly charts also show a 3-4 week pattern evolving that we have seen before. Starting 11/23/07 and 07/18/2008, we see a weekly bar with a large blowout widening spike and close near its tights and then a congestion phase of inside bars for the next few weeks. This is then followed by a significant breakout widening of the initial spike week's wides. This same pattern is evolving currently. From the 01/16 spike, we have now had four weeks of sideways congestion.

We would look to be buying protection on a break above 230bps (on the weekly charts) but for an earlier entry short, we would scale in from 209.5bps, with a stop at the 188.5bps tights of the last four weeks. Our proprietary indicators show that the uptrend remains in tact but short-term is converging to longer-term trends and we would wait for a divergence to re-enter short.

Daily View
The trend channel made from lining the 10/09/07 tights to 05/01/08 tights and extending parallel from the 07/27/07 wides is providing a significant area of support and resistance for the daily charts of IG11.

There is also a very credit-bearish pattern evolving in the daily chart. The 'W' bottom that we have seen twice before in the last few years is forming very cleanly. From 09/06/07 to 10/18/07 we formed a very attractive 'W' bottom which saw a huge breakout widening of the middle peak. The same pattern evolved from 04/21/08 to 05/20/08 and we saw a major breakout widening from the middle peak of the pattern.

From the 12/18/08 highs we have formed a clear 'W' pattern in daily OHLC bars, with this week's rally and turnaround forming the second leg of the 'W'. The 188bps tights of the pattern provide significant support for any shorts (with a break looking to be sold (protection) potentially down to 150bps support. We feel a better approach is to look for breakouts of the middle peak at around 226bps.

The risk (distance to support/stops) is high still and we think the channel of the 'W' may hold but with the stimulus and Geithner plans, we sense an aggressive sell on news spike coming. The MACD is directionless as is our ADX indicating (what we already know) that the market is going sideways as investors sit on their hands ahead of the 'new CDS' contracts and the Geithner plan.

Hourly View
Clearly, using hourly bars is for the dealers or scalpers in the market but we find it very useful for short-term support and resistance analysis and furthermore it provides a much clearer view of congestion areas.

There is a major credit-bearish triangle forming from the 12/05/08 wides to 01/21/09 wides extended to today combined with the 11/05/08 to the recent 190bps tights lower channel. This is converging to a crux at the current levels and time and with the major support from this longer-term trendline low, we would expect to see an upside breakout (widening).

There are some relatively wide congestion bands that stand out for traders. The tightest is from 130-150bps and provides both a target for any bullish credit trades from here as well as longer-term stops for bears. The 180-200bps range has been very heavily traded over the last few months and provides a healthy range for trading within a channel but we would be nervous of breakouts either way. On the upside (wider) the range from 255bps to 170bps provides a significant target for shorts.

All trend indicators show that we are trendless but if investors are long credit then our Parabolic stops show a level around 223bps as a very solid stop (and accelerating). Notably, the Market Profile analysis performed on the intraday data that we track shows an overly-active region in the 190-205bps range and a major hole in the 230-260bps range. Although we know markets are non-normal, we have found this tick-by-tick histogram to be useful in the past for identifying potential gaps.

IG and HY Pivots
Our proprietary pivot points on IG and HY provide useful support and resistance levels within their recent ranges.

Our pivot point analysis suggests intraday resistance at 198.4bps in IG11, and breaking support at 191.97bps or resistance at 201.47bps as significant, with the index trend bearish (based on pivot point moving average changes), shifting tighter by 0.28bps per day over the last few days. On a short-term basis (based on the last 5 days trading), we see 198.75bps as a critical pivot point with 209.25bps, 218.5bps, and 227.75bps as important resistance levels, and 189.5bps, 179bps, and 169.75bps as important support levels. The short-term 'protection' relative strength indicator on IG moved from stable to strongly oversold (protection) at 26.7%.

Our pivot point analysis suggests intraday resistance at 1382.83bps in HY11, and breaking support at 1346.52bps or resistance at 1430.61bps as significant, with the index trend bearish (based on pivot point moving average changes), shifting wider by 3.81bps per day over the last few days.

On a short-term basis (based on the last 5 days trading), we see 1390.2bps as a critical pivot point for HY10 with 1460.39bps, 1523.16bps, and 1585.93bps as important resistance levels, and 1327.43bps, 1257.24bps, and 1194.47bps as important support levels.On a short-term basis (based on the last 5 days trading), we see 1390.2bps as a critical pivot point for HY10 with 1460.39bps, 1523.16bps, and 1585.93bps as important resistance levels, and 1327.43bps, 1257.24bps, and 1194.47bps as important support levels.