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
I get it. I continue to look silly posting bearish things as the market levitates. Well, here is another silly bearish nugget for good measure. Sure, the sky pilots in junk bonds are chasing yields to the heavens. Why, just look at HYG go!
But its ratio to long-term Treasury bonds is not so stellar. It’s just another small divergence to the bull festivities, but there it is none the less.
I happen to think nominal T bonds have a good shot at rising soon. If that should happen, for risk to remain ‘ON’ junk bonds had better rise even faster.
On the surface a nominal look at junk bonds shows ‘nope, nothin’ wrong here’. Risk still ‘ON’. But a look at junk in relation to long term T bonds tells a different story. Is risk sneaking toward ‘OFF’? Just saying…
As we know, the risk put so definitively ‘ON’ by policy making is nowhere so evident as in junk bonds. HYG is flying merrily higher, but with a bearish divergence by RSI. The chart shows several other instances, one of which failed to resolve bearish.
Interestingly, HYG did correct hard in 2013 as debt of most kinds came into serious question, but it was not off of a negative RSI divergence and the SPX in the lower panel totally ignored it. That was probably owing to the ‘Great Rotation’ promotion.
Anyway, HYG is on a negative divergence and odds are it will end up meaning something eventually.
The Junk bond fund HYG and its ratios to Investment Grade and T bonds say that the crack abusers are alive and well and hence, so is speculation as of this moment. There is no bearish divergence to the market by this measure.
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.