High Yield Prices are Sagging

For the first time in many weeks, the S&P500 lost some ground. That said, the loss was tiny—only a 0.2% drop. So despite the headlines about stocks retreating, prices remain very close to all-time highs. Volatility did inch up, as would  be expected in a week when prices fell. But the VIX index remains near the low end of its multi-year range; in other words, traders and investors remain complacent and if anything continue to sell volatility betting that it will not rise measurably anytime soon. Volume on the S&P was a bit higher that usual over the last four weeks, but it remains on the low end of longer term ranges. Here too, there were no signs of any type of panic selling.

In US macro news, the week was fairly quiet. While consumer credit rose a bit more than expected, job openings (in the JOLTS survey) and wholesale trade only met expectations. On the downside, initial jobless claims and consumer sentiment were both weaker than economists had predicted. So not a lot of new information was reported last week, but the few results that did come out did nothing to change the fact that the US economy is still limping along in slow-growth mode.

There were several interesting developments, however, on the technical analysis front.  First, the upward momentum in prices, especially when viewed on the daily charts, has slowed considerably. In fact the MACD indicator (on the dailies) has turned bearish—the fast line has crossed below the slow line and both lines are sloping downward. This is still not a huge turn downwards, but it’s something to pay attention to when prices remain near record highs.

Another interesting development is the deterioration in market breadth. The advance-decline line, for example, has not only taken a big dive down, but it’s turned negative. In other words, many more stocks are declining than advancing….over the last week.

Finally, cross market indicators have also taken a bearish turn. High yield bonds, for example, have started to deteriorate far more than the overall S&P500 price. This can be seen on the HYG ETF or on the Merrill Lynch high yield option adjusted spread.  And since high yield bonds are considered to be risk assets, similar to equities, these two asset classes tend to be fairly well correlated. So when high yield falls in price, there’s a good chance that stocks will tend to follow high yield prices, in this case, downward.

So while there are no super loud alarm bells ringing, several quieter but still very important alerts have gone off—US stock investors, almost all of whom are completely bullish these days, should pay attention to these signals.


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