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…
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.
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.
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.