Credit concerns rise as stock market tests highs

As the S&P 500 ($INX) flirts with highs last seen in October 2008, the credit markets have been on edge, and the perceived risk of default is risen to its highest levels in a month -- a time when the S&P was 50 points lower. Since reaching a low point the first week of August, the cost of insuring against default on a basket of investment grade-rated debt has risen 15 percent, and the same measure for lower-rated "high-yield" or "junk" credits jumped 16 percent, according to data from Markit CDX indices. Similar indices tracking subprime mortgage-backed securities and commercial MBS have also fallen sharply in the last few weeks.

The conflicting signals -- either the stock market or bond market must be wrong -- are a sign that the massive rally in equities could be drawing to a close. The bond market is traditionally viewed as the more prescient forward indicator, and as credit investors show more risk-aversion (Treasury yields have also dropped in the last week) while stock investors bullishly march on, the odds of a negative shock jump. What stocks are most at risk?