Posts Tagged 'JNK'

Is The Market Topping?

The following article originally appeared at MarketWatch on Friday 3/8/2013. Despite nervousness over new market highs, this rally appears to be in the early stages, not the end.

With the market hitting new highs (DOW) or closing in (S&P 500), the topic du jour for the past couple of weeks, has been whether or not the rally can continue.

In my last post, I noted that JNK, the SPDR High Yield bond index ETF, was dropping while the S&P 500 was continuing up. Since JNK and SPY have a high correlation (they tend to move in the same direction) something was due to give. Either SPY was due a selloff, or the correction in JNK was done and it would soon follow SPY up. As shown in the chart below from freestockcharts.com, Spy (the red and green candle chart) has moved on to new highs since the downturn started in JNK, shown by the vertical white line. Spy did pause a bit to digest the sequester non-event, but it didn’t even drop to its support level, shown by the longer up sloping white line. And in fact JNK did resume a modest uptrend.

chart1

The point being, SPY shrugged off two negative influences, a drop in high yield bond demand (lower price for JNK) and totally shrugged off the sequester.

This leads me to my next market indicator to watch.

The market seems to go through four distinct cycles:
1. Up on bad news
2. Up on good news
3. Down on good news
4. Down on bad news

It seems to me the market is still in phase #1, up on bad news, and hoping to get to #2, meaning news becomes consistently good. Not that all current news is bad by any means. In fact we’ve had some pretty good economic news lately. But when you include political events, news has been a mixed bag. And when confronted with bad news, the market is shrugging it off. Slow earnings growth? No problem, it will get better. Sequestration? No problem, it’s just politics. Italian election? No problem, the ECU will rein them in… And on really good news, good ISM report, the market is having really good days.

One easy way to follow the economic news is to use MarketWatch’s economic calendar.

chart2

On a daily basis you can track economic reports and see the market’s reaction. I like to look at the data at the end of the week for a bigger picture of the data and market trend. This leaves the more subjective political news. My observation is that the market is shrugging off nearly everything political. Perhaps the first crack in our current rally will be when the market actually reacts negatively to what would seem to be negative political news.

For now, my strategy is to stay bullish. While I personally can give a pretty ugly laundry list of reasons the market could (or should) go down, for now I’ll assume the market is smarter than I am, and not fight the trend.

A Troubling Sign from Junk Bonds

The following post originally appeared at MarketWatch.  

In my last post I made the point that there is no reason to extrapolate that the market is going higher or lower simply because it is approaching all time highs. My plan is to look at several indicators that do matter, and see if we can find solid reasoning for the market to continue its advance or correct.

While I had planned on this being a fairly optimistic post, one development over the past week has the potential to be signaling imminent trouble in the equity markets.

Below is a graph of JNK, the SPDR High Yield Bond Index ETF. I follow this closely as it makes up a large percent of our Dividend Plus strategies. As you can see since June of last year it has formed a nice upward trend. The yellow line is its 30 day moving average (SMA), the average price over the past 30 days.  The graph shows that not only has JNK been moving up, but it has been doing so with a fairly low level of volatility as its price has meandered around the 30 day SMA. Just looking at this chart, the recent downtrend is not worrisome, as it is still within its 8 month uptrend.

chart1

However, if we look at the next chart we see a reason for concern. The red and green line is JNK again, but this time I’ve added SPY, the SPDR’s S&P 500 Index ETF. While SPY is much more volatile than JNK, in general they do move in the same direction. Until about two weeks ago. SPY has continued to rally, while JNK has turned decidedly negative.

chart2

While in the short run it would not be uncommon to see a divergence, in the longer term JNK and SPY will trend in the same direction.  Meaning that over this coming week I’d expect either SPY to start following JNK down, or JNK to reverse and start to rally back up to the top of its trend channel.

Fundamentally, JNK is an index of lower quality corporate bonds. In a softening economy companies are less likely to be able to make interest payments on their debt and JNK will go down. In a strengthening economy JNK will tend to rise, as even lower quality companies will obviously perform better in an improving economy. What we have seen over the past few weeks is that corporate earnings have come in and have been slightly better than expected. More importantly most companies have been giving pretty solid guidance s to their expectations for earnings in 2013. This should be an ideal environment for JNK.

The question I will be trying to answer this week is whether investors in high yield bonds are seeing something that stock investors have so far ignored, or has the two week sell off just been a natural short term correction? If so I expect a rally in JNK. If not, we will look to sell JNK and sit in cash until the markets sort themselves out.


bill@401advisor.com • 937.434.1790

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Charles H. Dow Award Winner 2008. The papers honored with this award have represented the richness and depth of technical analysis.

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