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<\/p>\nHigh yield bonds just fired a warning shot.<\/p>\n
The action in the junk bond market tells us a lot about the average investor’s willingness to take risk. That, in turn, tells us about the potential for a rise or fall in the stock market.<\/p>\n
When high yield bonds are rallying, it’s a “risk-on” environment. That tends to be bullish for stock prices.<\/p>\n
When high yield bonds are falling, investors are in a “risk-off” mode. That’s bearish.<\/p>\n
For the past six weeks, the junk bond market has been stuck in a tight trading range, which is neither risk-on, nor risk-off.<\/p>\n
Not surprisingly, the broad stock market has also been stuck in a tight trading range. The S&P 500 started the month of April at 4122. It’s right near that same level today.<\/p>\n
But, the high yield bond market broke down on Tuesday. If it doesn’t recover right away, then the stock market is in for a tough time.<\/p>\n
Look at this chart of the iShares iBoxx High Yield Corporate Bond Fund (HYG)…<\/p>\n
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On Tuesday, HYG closed below the support line of its six-week-long consolidation pattern. If it doesn’t recover and close back inside the pattern within the next day or two, then HYG is most likely headed lower.<\/p>\n
The next support level for HYG is down at the March low at about $72.50 per share. That would paint a rather ugly picture on this chart.<\/p>\n
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Free Trading Resources<\/strong><\/p>\n Have you checked out Jeff’s free trading resources on his website? It contains a selection of special reports, training videos, and a full trading glossary to help kickstart your trading career \u2013 at zero cost to you. Just click here<\/a> to check it out.<\/p>\n<\/p><\/div>\n<\/div>\n <\/p>\n The action in HYG tends to lead the action in the stock market by anywhere from two days to two weeks. So, if HYG continues lower – towards its March low – then the stock market is vulnerable to a decline towards its March low as well.<\/p>\n That implies a drop towards 3850 on the S&P 500. That’s more than 6% below the current level.<\/p>\n Maybe that seems extreme to some readers. But, keep in mind…<\/p>\n
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