Everyone watches the S&P and everyone quotes the Dow. Maybe you’ve even got a CNBC alert pinging your phone when the Nasdaq moves more than 1%.

But if you’re only watching equities, you’re not seeing the full picture.

Because when real stress hits the system, it usually shows up somewhere else first.

I’m talking about credit.

The bond market — especially the junk corner of it — is where cracks appear before things break in equities.

It’s like the underbody of a race car. 

You might not see it or think about it, but if something down there starts rattling, the whole machine’s in trouble.

And right now I’m hearing a little rattle.

Let me show you why that matters — and how to trade it.

Credit Where It’s Due

We’ve seen it play out time and again: When the cost of credit starts moving, risk assets don’t stay quiet for long.

Back in 2007, before equities even sniffed any danger, credit spreads were already flashing red. 

The ABX index (basically CDS for subprime) blew out while the Dow was still printing fresh highs.

Same thing happened in 2020. 

The S&P was hanging in there, while junk bond spreads were already widening like crazy in late February. 

By the time most traders started hedging, credit guys were already packing up for the beach.

Right now, I’m not calling for a 2008. 

But I am saying: If you’re watching the market and ignoring credit, you’re flying half-blind.

Start with high-yield spreads, the difference between what junk-rated companies pay versus Treasuries.

When that gap starts moving wider, it’s telling you credit risk is rising. 

It means investors are demanding more compensation to own risky paper. They want to get paid for the shot that someone might actually default.

Same with IG (investment grade) spreads. 

If those start creeping up, it’s a signal that even higher-quality borrowers might be getting squeezed.

Keep an eye on default rates too, especially in sectors like real estate, energy, and small-cap industrials. 

When you see defaults tick up in those corners, it’s usually the canary in the coal mine. 

Weak links always snap first.

And once a few start breaking, the contagion spreads fast.

Look Between the Cracks

So how do you trade it?

One of my favorite setups in this kind of tape is credit dispersion.

When stress hits the system, the market starts picking winners and losers. 

Not everything sells off at once. Instead, you get big gaps between the haves and the have-nots, especially in the bond market.

You can play this by going long strong-credit companies and short the junkier names. Or use ETFs like LQD (investment grade) vs HYG (high yield) to express the same idea.

Another way: credit default swaps (CDS). These are like insurance contracts that pay out if a company defaults.

When traders smell risk, CDS premiums spike. 

You don’t need the company to go bankrupt; you just need perceived risk to go up. That can make for a high-conviction, asymmetric trade if you know where to look.

Finally — and this is for more active hands — long credit hedges can work beautifully in a sideways-to-down equity tape.

Think puts on HYG or JNK, or bear call spreads if you want to define your risk. 

These tend to be cheap when volatility is low, and they pay off big when spreads gap wider and junk starts to sell off.

Once Removed

Bottom line?

If you want to stay one step ahead of the equity market, start watching the one it’s borrowing money from.

The credit market doesn’t scream. 

It whispers. 

But when it does speak up, it pays to listen.

Stay street smart,
Jeff Zananiri

P.S. Tim Sykes is closing in on $8 million in trading profits — and you could watch him cross the line live.

He’s hosting a 2-day virtual event from October 21–22 to show you exactly how he’s done it.

It’s all about supernova stocks, the strategy that built his trading career.

You’ll see:

• Real-time trade examples as the market moves
  
• His full 7-step Supernova formula
  
• And insights from students who’ve gone from beginners to millionaires by following his method

This event is filling up fast. Claim your spot now before it’s gone.

*Past performance does not indicate future results