You can't afford to ignore the credit market

Changes in a company's credit quality can predict what will happen to its share price - and credit is now a more important influence than at any time since 1998. What signs is it sending us?

Pete Arnold of the Egan-Jones credit-rating agency, and the rest of Wall Street have a saying: "Credit precedes common." In other words, changes in a company's credit quality can predict what will happen to a company's share price.

Mr. Arnold's phrase is not an entirely new idea, but it is a particularly timely idea. In the current investment climate, no prudent investor can afford to ignore what's happening to a company's balance sheet. A company's financial position will often weaken first. Then, the market will crush the stock. Therefore, if you keep a close eye on the financial health of your investments, you have an early warning system about danger for the stock price.

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