By Jeffrey Snider of Alhambra
“junk bonds traded as if the worst were only just around the corner”
The most important outbreak or story of 2015 had to have been the junk bond reversal. It combined all the major elements of what investors and economic agents are both fearing and, at one point in the past anyway, hoping. It is the confluence of finance, “dollars”, liquidity and economics with or without recovery and the best scenario. The FOMC raising rates is supposed to confirm the brightest outlook, which would only lead to more extension in the credit cycle, and yet junk bonds traded as if the worst were only just around the corner. It isn’t so much the selloff, though that is obviously important, but rather how increasingly the selloff is being treated as permanent.
Continue reading A Year in Junk
No ifs, ands or buts… Junk Bonds (high yield) have entered a bear market as they just broke down below the October 2014 lows, which is the bear parameter for the stock market as well. JNK is similar… worse actually.
Never mind 20% rules about bear markets, this is now a downtrend on an intermediate basis and cyclical bear market (barring some sort of reversal stimulant, like policy making designed to take us further down the Rabbit Hole of debt, leverage and speculation). Even if this bounces, it would have to get all the way above 89 to neutralize the trend.
Continue reading High Yield Bear Market
This colorful specimen is a chart we have used in NFTRH along with all the other indicators, economic data points and yes, straight technicals we have used to gauge the coming of the current questionable (at best) stock market environment.
We expected today’s market bounce and now chart jockeys are battling it out from the bullish and bearish sides (I’m with the latter on the short-term), but things below the surface need to be considered as well. I see peoples’ charts that make me want to be bullish and others that send me the opposite way. These guys are way more involved chartists than I am.
But personally, I don’t give a damn what someone’s chart says unless I have other intelligence behind their conclusion. The idea that risk aversion continues to percolate below the surface may well be bullish in a few months (along with certain over-bearish sentiment data), but in diverging today’s bounce, it is not bullish in the short-term.
There are good arguments for the both the ‘upside acceleration and blow off’ and ‘correction’ scenarios, short-term in the markets. This creepy looking chart of junk bonds argues for the former, with its creepy looking bullish pattern. Junk bonds are a speculative barometer.
Disclosure: I am short SPY (no leverage; straight short with limited leash), but net long. Longest position of all… cash.
What I want to know is whether or not this chart (used for many months as a standard in NFTRH as a tool to help gauge risk on/ off) is going to bump back up like it did in 2008 when it (or more accurately, its implications) sucked people back into speculative mode just in time for the crash… or it will just continue on down? Either way, it’s bearish but a back test of the red line could come with a bull suck-in into 2015. It’ll be interesting.
This market is so interesting. I feel like just putting up chart after chart and letting you come to your own conclusions rather than always being so wordy about everything. Here, take in the message of one of the most speculative excesses bred by the Fed’s policy (lust for junk bonds, top panel) and junk’s relationship to what is thought of by the masses as a safe alternative. Let the picture tell its story…
One reason I think that the next correction – if it’s not a bull killer – will be a big one is because of the bullish pressure building from the dumb money, while at the same time forensic indicators like junk bond to investment grade and T bond spreads show smarter money creeping out of the markets.
Nominal HYG is at a trend line, fine. It’ll probably hold for a while. But HYG vs. LQD and TLT has been declining all year. This is a market sponsored by the dumbest of money.
Here is but one more view among many out there that I could post…
Continue reading Bearish Divergence