Customer Service 1 (888) 261-2693
Advanced Search

NOW Is the Time to Be Worried

By Jeff Clark
Tuesday, June 9, 2015

High-yield bonds are flashing a major warning sign...
Back in March, I showed you the classic "risk on/risk off" relationship between the stock market and the junk-bond market. In short, when investors are willing to take on risk to seek higher returns, they flock to stocks and high-yield junk bonds. When investors are conservative and seek to protect capital, they sell stocks and junk bonds. So these markets tend to move in the same direction.
When we last looked at this relationship, the stock market had hit a rough patch... But high-yield-bond prices were holding up, so I told you not to worry about stocks.
Since then, the S&P 500 has pushed higher – hitting a new all-time high two weeks ago. But now, the junk-bond market has changed...
Take a look at this chart of the iShares iBoxx High Yield Corporate Bond Fund (HYG)...
Prices of high-yield bonds broke down last week... causing HYG to break decisively below its 50-day moving average (DMA). The 50-DMA is widely seen as the determining point between an intermediate-term bull and bear market. Stocks that are trading above the line are in bull markets. Stocks that are trading below their 50-DMAs are in intermediate-term bear markets.
So high-yield bonds crossed into bear-market mode last week. And that means it's time to worry about stocks...
The red arrows on the chart above show each time HYG has broken below its 50-DMA over the past year (and did not recover immediately, as it did in March).
Now, take a look at this chart of the S&P 500, with red arrows marking selloffs over the past year...
As you can see, the red arrows on the HYG chart line up well with the selloffs in the S&P 500 over the past year.
Each time HYG has broken below its 50-DMA, the S&P 500 has declined as well – with selloffs ranging between 3% and 7%.
The last time this happened – back in November – HYG fell 6% in just a couple of weeks. The S&P 500 lost 5% during that same time frame.
With HYG breaking below its 50-DMA last week, the odds are high the S&P 500 will soon sell off as well.
So it might be time for traders to start getting out of the stock market. At the very least, investors should be tightening up stops in order to protect their profits. Aggressive traders should consider speculating with short sales in the short term.
Best regards and good trading,
Jeff Clark

Further Reading:

You can learn more about how to use trailing stops and position sizing to protect yourself in today's market, right here:
The Trailing Stop Strategy
"If you follow the advice below... you'll never lose another night's sleep worrying about which way your investments will go tomorrow."
Position Sizing
"Ignoring this idea is responsible for more losses than any other investor mistake."

Recent Articles
Market Notes
Bank stocks Morgan Stanley, PNC Financial Services, and BB&T soar to fresh 52-week highs.
Wheat prices jump 9% over the past month.
Biotech-stock fund XBI touches a new 52-week high... up 31% in 2015.
Electronics retailer Best Buy drops 10% over the past two months.
From The Crux
Market Watch
Symbol Price
S&P 500 2126.06 -0.2% +12.3%
Oil (USO) 20.25 -1.2% -46.7%
Gold (GLD) 115.60 -0.1% -7.3%
Silver (SLV) 16.34 -0.3% -12.8%
U.S. Dollar 96.14 +0.8% +19.9%
Euro 1.10 -1.0% -19.4%
Volatility (^VIX) 12.13 +0.2% +0.8%
Gold Stocks (^HUI) 171.28 -0.9% -21.1%
10-Year Yield 2.21 +1.1% -13.7%

World ETFs
Symbol Price
China (FXI) 51.34 +3.0% +45.1%
India (IFN) 27.07 0.0% +20.1%
Israel (ISL) 19.01 -1.1% +12.6%
Japan (EWJ) 13.28 -0.2% +19.3%
USA (SPY) 212.99 -0.2% +14.5%
Taiwan (EWT) 16.44 +0.2% +11.7%
Singapore (EWS) 13.43 -0.2% +1.0%
S. Africa (EZA) 69.11 -0.7% +0.2%
Canada (EWC) 28.48 -0.7% -5.4%
S. Korea (EWY) 59.87 +0.5% -7.2%
Lat.America (ILF) 30.99 -1.7% -18.3%
Russia (TRF) 11.37 +0.3% -15.6%

Sector ETFs
Symbol Price
Biotech (PBE) 57.65 +0.1% +49.9%
Semis (PSI) 27.94 +0.6% +37.5%
Health Care (IYH) 159.05 -0.3% +30.0%
Software (PSJ) 43.10 +0.3% +24.3%
Big Tech (QQQ) 110.47 -0.1% +25.2%
Consumer Svcs (IYC) 145.15 -0.1% +22.1%
Retail (PMR) 39.19 -0.7% +19.2%
Media (PBS) 27.34 +0.0% +15.3%
Financials (IYF) 91.29 0.0% +15.1%
Construction (PKB) 24.06 -0.9% +12.7%
Defense (PPA) 36.77 -0.5% +16.2%
Insurance (IAK) 50.35 -0.4% +10.4%
Transportation (IYT) 152.20 -0.8% +8.1%
Industrials (IYJ) 110.21 -0.4% +10.5%
Real Estate (IYR) 76.01 +0.0% +11.7%
Telecom (IYZ) 29.90 -0.6% +3.4%
Utilities (XLU) 44.57 -0.2% +10.2%
Basic Mat (IYM) 85.25 -0.1% +2.3%
Water (PHO) 26.07 -0.8% +1.3%
Alt. Energy (PBW) 5.71 -0.2% -5.7%