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Chart Of The Day Stock Bond Divergence

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by Felix Salmon
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Feb 22 2008 12:00am EDT

Chart of the Day: Stock-Bond Divergence

This is from a Goldman Sachs research report dated yesterday. The details:

We compare the investment grade CDX spread to the implied volatility of a 25 delta put of an equal weighted basket of the stocks represented in the CDX index.

No, I'm not entirely clear on what a 25 delta put is, either. But the bigger picture is clear enough:

Indicators of equity and credit risk have diverged dramatically over the past month. In our view, this divergence is caused by technical factors in the credit market. They also reflect a more negative view on recession, write-downs and funding issues that we believe equities have not yet recognized.

In other words, equities aren't looking so hot right here.

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