Here’s the latest snapshot of a nation hopped up on risk and speculation, right in line with the Fed’s wishes. Ooh, the debt squabblers looked like they might agree on creating more of our unpayable debt yesterday? Yey, spreads up! Today there is some pretend stuff in the media that the squabblers may not be ready to agree? Down a little. So goes life in the casino.
This is the legacy of today’s policy making. Junk bonds barely flinched in the face of the debt drama and actually bounced in relation to T bonds, Investment Grade bonds and in nominal terms a couple days before the big feel good yesterday. This is not bearish and it furthers the point that people were suckered into thinking the world was ending over some Washington theatrics played out for public consumption.
In a strange way I thought ‘it can’t play out exactly the same way all previous sucker sentiment events have played out over the last couple years, can it?’. Well yeh, it can and it did.
Junk bonds vs. Investment Grade bonds are breaking down, but barely holding a higher low. Of more importance, the banks are breaking to a lower low vs. the S&P 500 (lower panel). These are two ratios that have shown amazingly similar stock market leadership.
BKX-SPX has followed interest rates all the way up, which makes sense given the implied profit motive of a yield spread from the Fed’s manipulated ZIRP to the other durations out on the freer parts of the curve.
This week is tough because of the Syria noise but going straight by the charts, it looks like the resolve of the ‘organic’ bull market touts is going to get tested real good.
Well if this and other sentiment data are to be believed, the bears will get another kick at the can before too long.
Throw in the over-bullish AAII (individual investors) and II (newsletter writers) and we have got another potential bear opportunity in the making. Watch the likes of junk bonds (as an indicator for speculation) and more importantly, junk bonds vs. investment grade bonds as shown below.
While junk tanked during the May/June ‘taper’ hysteria, junk vs. IG kept up a positive divergence which, wouldn’t you know manifested in a new bull leg. The spread in the lower panel is actually a sentiment indicator and it shows fearless speculators who think Bernanke’s got their back.
This is a negative divergence to the ‘Risk On’ trade, including the stock market.
As the credit markets (AKA funding mechanisms) go, so have gone inflated asset markets over the last decade or two, subject to some very rude interruptions. It looks like credit of all kinds is being rudely interrupted right now. Deflation is credit gone into hiding and this time US T bonds don’t seem to be playing ball.
Junk bonds (HYG fund shown below) have been hugely popular as casino patrons rushed for yield at the behest of the Fed, which took away yield elsewhere. Well, now they may be getting it in the form rising Treasury yields (declining T bonds). It seems counter intuitive that junk would show risk coming OFF, yet T bonds are not benefiting.
That is the screwed up market we have here, with normal signals all put in blender. But it is safe to say that junk bonds remain an indicator to the will to speculate.
HYG declined to the first notable support at the weekly EMA 30 and is in danger of losing that average. Next stop would probably be the EMA 100, which supported the Flash Crash hysterics in 2010 and the Euro hysterics
last year in 2011.
Volume trends have indicated a rush into junk bonds created by the post-2008 environment that has seen policy makers compel people into risk. But there has been some huge negative volume the last couple weeks and as we noted in NFTRH, this volume looks more like a kickoff to something than a final capitulation of something because there has been no downtrend from which to capitulate from.