The stock market has farther to fall… At least, that’s what the action in junk bonds is telling us.
High-yield bonds have been falling lately. And, as we’ve pointed out many times, high-yield bonds tend to lead the stock market by anywhere from two days to two weeks.
So, continued weakness in junk should lead to more weakness in stocks…
Take a look at this chart of the iShares iBoxx High Yield Corporate Bond ETF (HYG)…
The last time we looked at this chart was back in August, when I pointed out that HYG had fired a “warning shot.” HYG had broken below its 50-day moving average (MA – blue line). And, the previous two times that had happened, the stock market pulled back soon afterwards (blue arrows).
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In August, however, HYG quickly recovered. It popped back above its 50-day MA. And, that action helped prevent a more significant correction in the stock market.
Now, junk bonds have been falling for most of the past month – and the stock market has been falling right along with them. But, unlike in August, we’re not yet seeing any signs of strength in HYG.
Let’s take another look…
The chart shows a series of lower highs and lower lows.
And, HYG just recently broke below its 50-day MA. This is a bearish setup… Unless HYG can recover immediately and climb back above its 50-day MA, it looks like it’s headed for lower levels.
And, if junk bonds are headed lower, then the stock market is headed lower too.
Traders shouldn’t be too anxious to buy the dip right here. It still looks like we’ll have a better opportunity to put money to work in the weeks ahead.
Best regards and good trading,
Jeff Clark
P.S. I’m curious, have you made any significant gains following junk bonds? Will you be taking advantage of the next big dip?
Write in to let us know your thoughts – and any questions you may have – at [email protected].
Reader Mailbag
In today’s mailbag, subscribers have sent in their thoughts on Jeff’s recent essay about the absurdity of our current times…
Tell Jeff I appreciate his satire this morning. He made me smile. “Let’s go Brandon.”
– Bruce
Best satire I’ve seen yet! Thanks for the morning entertainment!
– Susan
Your essay on “Rules Are Rules” is right on target. Absurdity has taken over in D.C. and many other state capitals. One statesman many years ago is attributed to saying the following – “All that is required for evil to triumph is for good people to do nothing.”
– Ben
Well said. The absurdity of all of it is amazing. The $3.5 trillion bill cost nothing.
We shouldn’t get together for Christmas, but thousands come across the border – unvaccinated, many with COVID – and are put on buses and shipped all over the country. There ought to be a rule that if you are going to come into the country illegally you must have proof of vaccination. Rules are rules.
– Michael
Well played, sir. Your essay really struck a chord as most mornings when I turn on the news, I find myself shaking my head in disbelief at the current state of affairs. I’m so glad I no longer have kids in public school and therefore risk being labeled a “domestic terrorist” for the crime of showing up at a school board meeting.
– Charlie
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].