High Yield Corp Bonds are again flashing a warning for SPY

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Another sign of caution for equity prices is the rolling over of High Yield Corp Bonds ( HYG ). The price of HYG does tend to alert us to the time when investors are pulling money off the table in the markets and cashing in their chips. It's not a perfect indicator, but it is an indicator that I watch, amongst many others. I have noted that IWM ( Russell 2000 Index ) has failed to hit a new high also, which gave us a good signal to short two times so far this year.

Note how HYG is just sliding slower at a steady pace. Clearly, investors piling into the USDollar are NOT buying High Yield Corporates, but if they are, it means that existing investors are swamping them with more supply than they can handle. In either case, this is a warning sign to pay attention to.

When this "log rolls over", there could be some fireworks.

I'll put "buy on HYG" and "sell on SPY" here.

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Meanwhile back in the real world for those of us who actually trade/invest, the high yeld junk bond market hit an all time historical high on Thursday April 16. That is based on the Merrill Lynch High Yield Master II Index, the proxy for junk bonds. It is a total return index meaning it includes dividends. Those who use a price only chart of junk bonds via say HYG or JNK just don't have a clue because dividends are not included. Those invested in the open end junk bonds funds also have seen their equity at new all time highs this past week.
Gary Smith Gary Smith
I apologize if my above comment seemed a bit harsh. If you click on the link below you will see what is actually occurring in the junk bond market and those invested in that sector. Quite a different picture than if you looked only at a historical "price only" chart of this market.

Bonds narrow down in trading range. sign of changing direction?
Bonds bounce off support
Now that is a discrepancy. I actually have on tab your last chart with the pair of HYG - it is a good and a good thing to keep reference of.
+1 Reply
2use 2use
So far bonds lower, stocks higher. How far can these to run apart?
what is meant "when the log rolls over", i understand the log scale on the right axis of the chart, but what action in the log constitutes a rolling over?....thank you for your response
timwest theloneranger
It's an expression we used when I was on Wall Street on a trading desk. Imagine walking on a stream full of logs. If you slip and then slide down between and under the log, you get crushed between the two logs and then can't push hard enough to get back up above the logs and drown. It's an awful expression, but thanks for asking me. It's rare when I use non-sensical terms in my charts. Sorry about that. Also, "rolling over" refers to falling after a peak.
+2 Reply
2use timwest
Learning minute with Tim :D
Isn't that an awful expression! I hadn't thought of that one in awhile, until the DAX chart I posted last week.
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