Suddenly Vultures Circle in the Credit Market


The Federal Reserve has everyone talking about hawks and doves this week. But another kind of bird may be swooping in: vultures.

Recent headlines suggest credit markets are getting squeezed. This could create bearish opportunities for traders willing to play buzzard and hunt out the dying animals.

First the timeline:

  • October 29: Market Insights alerts clients to selling in junk bonds. At that time, most other news outlets spoke of strong demand for the asset class.
  • November 21: Market Insights runs a special report on continued weakness in high-yield securities. Simultaneously, CNBC describes mounting “angst” in the $9 trillion corporate-debt market.
  • December 11: Former Fed Chair Janet Yellen warns of pressure in the leveraged-loan market, which is pretty much the same thing as junk bonds.
  • December 17: Reuters reports that banks are cutting back on loans as borrowers begin to struggle.
  • December 19: Bloomberg reports that big securities firms are stuck with unsold loans because institutional investors are exiting high-yield funds.

This weakening makes sense given the selloff in equities and pessimism toward the economy. On top of that, you have a lot of debt-laden energy companies and the drop in oil prices. Just check out the put activity in off-shore driller Transocean (RIG)!

Credit meltdowns can be actionable trends for stock traders willing to play the downside. For example, General Electric (GE) …but how to find them?

We created a special scanner on TradeStation that compares firms’ enterprise values to their market caps. Simply put, the higher the number, the more debt. We also sought out companies that trade at least 5,000 options per day because they’re more liquid. (Besides, put buying is less risky than short selling.) Here are some big names that popped up with readings over 4 times:

  • Petrobras (PBR): South American oil giant
  • Hertz Global (HTZ): Rental cars
  • J.C. Penney (JCP): Department stores
  • Caesars Entertainment (CZR): Casinos
  • Ford Motor (F): Autos

This list is just a sample. Want more? Watch today’s webinar on Golden Crosses at 3 p.m. ET, and we’ll throw in the credit scanner as a bonus!

Disclosure: This post is intended for educational purposes only and shouldn’t be interpreted as a trade recommendation.

Trade in milliseconds

Explore the most actively traded options

Trade 600+ futures products on an advanced platform

Previous articleHow Low Can Oil Go?
Next articlePut Volume Swells in Junk Bond Fund
David Russell is Global Head of Market Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.