AA Corporate Bond Spread vs. S&P 500, Correlation To SPX, And The Spread's Rate Of Change — Investment Grade Risk Indicator

Instead of looking at high yield corporate bond spreads versus the S&P 500, let's now look at investment grade corporate bond spreads versus the S&P (SPX). Peter Tchir of Brean Capital recently told CNBC that we should be focusing on investment grade bond flows and spreads to measure stock market risk.

Below I put up a chart of the BofA/ML AA Corporate Bond Option Adjusted Spread (OAS) versus the S&P 500 (SPX), the AA corporate bond spread's correlation to the S&P, and the AA corporate bond spread's annual rate of change (52 week ROC).

When looking at the previous cycle, there was first a positive correlation between the AA bond spread and the S&P when the Fed started to raise rates, but it didn't end up killing the bull market. However, when the second positive correlation occurred and the AA corporate bond spread's annual rate of change (52 week ROC) made a new high, that marked the end of the up cycle. This cycle is different, but a similar pattern could still occur today. If the AA bond spread's rate of change makes a new high when there's a positive correlation between the AA bond spread and the S&P 500, I think that will be a huge warning signal for the stock market.

BofA AA Corp Bond Spread vs. S&P500, SPX Correlation, ROC (%Chg) by Dvolatility on TradingView.com

*I had to publish the exact same chart again on Aug 23, 2016 because for some reason the CC and ROC indicators weren't updating when you moved the chart forward. Hopefully the indicators will update on this new chart. I notified Tradingview about it so hopefully they'll be able to fix this chart if it happens again.