Take a look at the divergence between the high-yield ETF (JNK) and the investment grade ETF (LQD).   This makes us a bit nervous – though no panic as JNK in only 1.28 percent off its high vs. the LQD, which is only 0.53 percent off its 52-week high.   The LQD trades more closely with the risk-free bond.

Last week we saw a break in the momentum of spread tightening across the board even as the VIX closed at a record low.  It seems very difficult to imagine that spreads can come in much further and we think we are very close to the floor.

Makes sense to take some risk off into this year-end rally.