The stock market put on a terrific performance last week.
The S&P 500 started the week in overbought territory. Technical conditions were warning of the possibility of a quick, one-day decline – which we got. But after just a few hours of weakness – not even a full day – buyers stepped up and rallied the market.
All the major indexes finished the week at new all-time highs.
It has been a remarkable October, which followed a remarkable September. And that makes it really, really tough to be bearish as we head into November and the start of the most bullish six months of the year.
But, since tomorrow is Halloween, it seems appropriate to take a look at what could be the spookiest chart in the market. Look at this weekly chart of the iShares iBoxx High Yield Corporate Bond Fund (HYG)…
HYG closed lower on the week. It was down just 0.25%, which is no big deal.
But remember, HYG tends to lead the broad stock market. It’s a terrific gauge of investors’ appetite for risk. When investors are buying junk bonds, it’s a “risk-on” environment. They’re likely to be buying stocks, too.
When investors are selling high-yield bonds, then it’s “risk-off.” So, a decline in HYG is an early warning sign for the stock market.
As you can tell from the chart, HYG has been forming a bearish rising wedge pattern for more than a year. There’s negative divergence on both the MACD momentum indicator and the Relative Strength Index.
This chart is set up for a nasty breakdown at some point. We should at least see something similar to the pullback that occurred last October. And that would cause some trouble for the broad stock market.
Of course, we’ve been warning of a potential top in the junk bond market for several months now. Nothing has come of it yet.
Like I said earlier, it’s hard to be bearish as we enter a seasonally strong period for stocks.
But don’t ignore this chart. If HYG breaks below the support line of the rising wedge pattern – at about $88 – then things could quickly turn scary for junk bond investors. And if it’s scary for the junk bond market, then it’s only a matter of time before it turns scary for the stock market as well.
Best regards and good trading,
Jeff Clark
P.S. In just a few short days, my colleague Teeka Tiwari is putting on his free live cryptocurrency training seminar. To learn more about the event, and to see how you could claim your portion of $1 million in bitcoin, click here…
Reader Mailbag
A real mixed mailbag in today’s Market Minute, as readers write in with thoughts about gold, our Delta Report earnings trades, and the Minute itself…
I like your Market Minute! It gives a clear, concise statement of your thoughts for the day. It is better than some of the subscriptions I pay for that use pages to tell something. What they say is no more accurate, less actionable, and sometimes is less clear than your short daily newsletter.
– Al L.
I have thoroughly enjoyed your tutoring through options trading. Of the current four services I am currently subscribing to (two of which I have already decided to get a refund), your information and explanations have been the best.
HOG was great in and out, good money. ABT, still on the fence – I did already unload half at a small profit. I am a bit of a cryptocurrency buff and an auto mechanic of 31 years, but need to branch out beyond crypto (and cars).
Goes without saying, never blindly trust a mentor and experience is what you get when you do not get what you really want. Keep up your good work, I do have faith in you.
– James R.
Regarding gold, I have not been surprised by the gold action because I have been watching the euro/USD action. The EUR/USD should find ultimate support at 1.15-1.155 and then move higher to over 1.20. This should scream “buy” for gold and gold stocks.
– Roger N.
Do you have any past experiences trading the high-yield bond market? Send in your thoughts, as well as any questions or comments, right here…