The Junk Bond Market Tells Us We’re Not Crashing Yet
The junk bond market is telling us it’s too early to bet on a crashing stock market.
There’s nothing wrong with being cautious. There’s nothing wrong with trimming some positions and raising some cash as the stock market puts on an oversold bounce.
But, betting aggressively on the downside right now is probably a mistake.
Yes, economic conditions appear to be slowing. Yes, there’s a bunch of political chaos that is adding uncertainty to the financial markets. And yes, the stock market is going to be volatile.
But, until the high-yield bond market breaks down, the stock market is not going to crash.
High-yield bonds are a leading indicator for the stock market. When “junk” bonds are rallying, it’s a risk-on environment. That tends to be bullish for stock prices.
When high-yield bonds are falling, investors are in risk-off mode. That’s bearish.
So, it’s useful to note that while the S&P 500 recently traded down 10% from its high – putting it in “correction” mode – the iShares iBoxx High Yield Corporate Bond ETF (HYG) has recovered to within spitting distance of its all-time high.
Take a look at this chart…
There isn’t anything bearish on this chart.
HYG is trading above all of its various moving average lines. And, the moving averages are in a bullish configuration – with the 9- and 20-day EMAs above the 50-day MA.
If the broad stock market was setting up for a crash, then the chart of HYG would be leading the way lower. But, that’s not happening… yet.
The action in the junk bond sector suggests the recent decline in the broad stock market is nothing more than a short-term dip.
Of course, that could change. If HYG starts to break down and lose the support of its moving average lines, then we’ll be setting up for a more significant decline in the stock market.
That will be the time for traders to add short exposure in anticipation of a crash.
I suspect it will happen at some point this year… just not right now.
Best regards and good trading,
Jeff Clark
Editor, Market Minute
This article was originally published on this site
