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<\/p>\n\tThe junk bond market is selling off hard.<\/p>\n
\tThe less-than-investment-grade sector of the corporate bond market peaked about one month ago. The decline started slowly enough. But it picked up steam last week. And now, high-yield bonds are in free fall.<\/p>\n
\tHere’s an updated look at the daily chart of the iShares iBoxx High Yield Corporate Bond Fund (HYG)…<\/p>\n
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\tI’ve showed you<\/a> versions of this chart a couple of times<\/a> over the past few weeks – just as the sector was starting to fall. Each time I warned that if the high-yield bond market breaks down, then the stock market should follow close behind.<\/p>\n \tIt’s widely known that the action in the junk bond market tends to lead the action in stocks by anywhere from a couple of days to a couple of weeks.<\/p>\n \tWell, here we are… easily a couple of weeks into a sharp decline in junk bonds. Yet, the S&P 500 closed yesterday within 0.6% of its all time high.<\/p>\n \tThis divergence<\/a> was the topic of conversation on a financial network television show yesterday. The talking heads discussed the breakdown in high-yield bonds and noted that stocks didn’t seem concerned. That prompted the moderator to ask the most dangerous question on Wall Street…<\/p>\n \t“Is it different this time?”<\/p>\n \tTo my disbelief, the talking heads agreed that conditions were different. They went on to explain why a breakdown in the high-yield bond market would not lead to a stock market selloff this time.<\/p>\n \tTheir rationale centered on the fact that so many high-yield bonds were concentrated in the telecommunication sector. Weakness in that sector is isolated. Other companies in other sectors are not experiencing the same sort of “credit crunch.”<\/p>\n \tNonsense. While HYG does hold about 3% of its portfolio in telecom company bonds, many of those holdings are still trading above par.<\/p>\n \tThe rest of the portfolio is well-diversified amongst a variety of sectors including energy, manufacturing, technology, pharmaceuticals, health care, retail, and others. High-yield bond prices in all of those sectors have fallen over the past month.<\/p>\n \tThis could very well be the start of a “risk off” environment – where investors lighten up on their riskiest holdings. Right now, that means selling off some junk bonds. Soon, it will mean selling off some of their more volatile stocks.<\/p>\n \tThis IS a warning sign for the stock market.<\/p>\n \tI can’t tell you for sure when stocks will react to the selloff in junk bonds. It could be today. It could be a month from now.<\/p>\n \tThe only thing I can say with confidence is it is most definitely NOT different this time.<\/p>\n \tBest regards and good trading,<\/p>\n \tJeff Clark<\/p>\n \tP.S.<\/strong> If you’ve ever watched the action in the market from the sidelines – wondering the best way to profit from the day’s conditions – make sure to check out my new presentation<\/a>.<\/p>\n \tIt tells the story of a trade that was set to wipe me out on the open… and of the secret technique I used to turn it into an absolute fortune by the close.<\/p>\n \tNow I’m revealing this secret technique … and there’s no better time to take advantage. Click here for more details.<\/a><\/p>\n \t![](\"https:\/\/casey-assets.s3.amazonaws.com\/images\/misc\/jeff-clark-signature.png\")
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