Investors are buying junk again, and that’s good news for the stock market.
When we last looked at high-yield bonds, they were selling off hard.The iShares iBoxx High Yield Corporate Bonds Fund (HYG) was down 6% for 2022 – an enormous move in three months for a bond fund.
And since the action in junk bonds tends to lead the action in the broad stock market by anywhere from two days to two weeks… it wasn’t surprising that the stock market began 2022 with a hard sell-off as well.
But by mid-March, junk bonds started to show some bullish action. Back then I wrote, “If high-yield bonds start to rally, then a stock market rally shouldn’t be far behind.”
And that’s exactly what happened…
Over the next two weeks, the S&P 500 gained 10%. Now let’s look at HYG’s situation today…
From its April high to its May low, HYG dropped about 8% (blue arrows). That’s a huge decline for a bond fund in just six weeks.
During that same timeframe, the S&P 500 lost 14%.
But by the middle of last week, HYG was grossly oversold – even more so than at its March bottom.
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Since then, investors have started to come back into the junk bond market.
Today, HYG is trading at about 2% higher than where it was last week. Although that’s not a huge move, it’s the first bullish action we’ve seen in the junk bond market in the past six weeks.
And this is a sign that investors’ appetites for risk may be improving. Junk bonds may be telling us that a significant, intermediate-term bottom is nearby.
If high-yield bonds can build on this week’s strength, then a stock market rally shouldn’t be far behind.
Best regards and good trading,
Jeff Clark
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