High yield spreads have really come in by a large margin since they widened out to just under 900 bps earlier this year.  Through yesterday’s close, spreads were sitting at 600 bps above treasuries according to the yield on the Merrill Lynch High Yield Master Index.  Most readers are aware that tighter spreads indicate looser risk appetites, so when spreads narrow it indicates that investors are more open to riskier assets and vice versa.  As things currently stand, spreads are testing a key level here representing the uptrend line from their cycle lows nearly two years ago.  High yield spreads bounced off of that trend-line on June 8th when they got as low as 582 bps but then widened out to as much as 632 bps last Thursday.  Since then, they have come in by 32 bps in a pattern resembling the one we saw back in late March when spreads initially tested and bounced at the trend-line from last Summer’s low just before oil prices collapsed.  If you are a bull here, you really want to see spreads repeat the pattern from March once again this time around.

Below is an updated look at our Dow 30 trading range screen.  For each stock, the dot represents where it’s currently trading within its range, while the tail end represents where it was trading one week ago.  The black vertical “N” line represents each stock’s 50-day moving average, while moves into the red or green zone are considered overbought or oversold.

The 30 members of the Dow remain mostly scattered, with 11 currently overbought and 5 oversold.  Most names have experienced upside momentum over the last week, especially stocks like 3M (MMM), Verizon (VZ), IBM, General Electric (GE), and Home Depot (HD).  Cisco (CSCO), Johnson & Johnson (JNJ), Pfizer (PFE), and Visa (V) are the four names that have seen downside momentum since last week at this time.

On a year-to-date basis, the average Dow stock is up 2.5%.  Goldman Sachs (GS) is down the most with a decline of 18.2%, while UnitedHealth (UNH), Verizon (VZ), Wal-Mart (WMT), and Exxon Mobil (XOM) are up the most.

“The yield curve—specifically, the spread between the interest rates on the ten-year Treasury note and the three-month Treasury bill—is a valuable forecasting tool. It is simple to use and significantly outperforms other financial and macroeconomic indicators in predicting recessions two to six quarters ahead.”       -NY Fed (June 1996)

With such a strong endorsement from the New York Fed as well as others in the economist community, the yield curve is one of the most widely watched indicators regarding the health of the US economy.  More specifically, when the spread between the yields on the ten-year and three-month US treasuries inverts, or turns negative, there is a high probability of a recession on the horizon.  The chart below shows the yield curve since the beginning of 2009.  As shown in the chart, the slope of the yield curve peaked shortly into 2010, and outside of a brief period in late 2013, has been trending lower the entire time.  Interestingly, in just the last few weeks, the slope of the curve has flattened further and is now within 3 bps of its flattest level of the cycle.  While the slope of the curve is still far from being inverted, flatter yield curves are generally associated with lower rates of economic activity.  In that light, the flattening of the curve isn’t exactly sending a bullish signal regarding economic growth.