Four indicators that you need to pay attention to.

Hat tip to Donald Coxe's latest monthly commentary Basic Points. Mr. Coxe laid out four important financial indicators that investors should look at to gauge the tight credit market and hence the equity market:

1) The TED Spread

This indicator - the yield differential between the three-month Treasury bill and three month Eurodollar contracts - measures risk within the global banking system. The spread over T-Bills reflects bankers’ pricing of the risk in short-term loans to each other. A lower TED spread means banks are pricing in a lower risk on short-term loan, thereby suggesting banks are willing to lend to each other again. The TED peaked around 500 when Lehman collapsed. It is currently 216. If it breaks 150 and stays there for at least a week, the financial crisis, according to Coxe, may "no longer command center stage."


The TED Spread Chart (One Year)

2) The S&P Bank Stock Index relative to S&P 500 Index

A rising relative index means the S&P 500 Bank shares outperform the S&P 500 Index. A sustainable rally of the S&P Bank shares relative to the S&P 500 may mean a re-rating of banking stocks, which would also led to a re-rating of the equity market. The credit market, being frozen by the collapse of the Lehman Brothers, would also be reactivated. The relative chart looks good as the index stays above 0.14.


The Relative chart of S&P 500 Bank Index against S&P 500 Index

3) The VIX Index

If the volatility index, a measure of the rate and magnitude of changes in price, keeps retreating, investors may be ready to go back to the equity market. VIX starts dropping back from the highs of the 80s. Looking good.


Volatility Index (VIX)

4) The Yen and the US Dollar

Since they have been playing role as a carry currencies for some time, their strength suggests the market is de-leveraging. Their retreat, on the contrary, means the market reverts to normalcy. That, hopefully, may mean the distress sales of hedge fund assets and of bankrupt assets have dwindled. The drop of DXY from 88 to 86is a good sign. If the yen can hold above 95, it would be another confirmation that the forced selling has ended.


The US Dollar Index


The Japanese Yen per 1 USD

When all four indicators have confirmed i.e. The TED spread to drop, the S&P Bank Index relative to S&P 500 Index to rise, the VIX Index to drop and the Yen/US Dollar to drop, it will be time to start buying stocks.