Why Should Stock Market Participants Watch Junk Bonds?

One of the biggest advantages that we have as technicians is the ability take information from one asset class and use it to make decisions in another. This is what we call Intermarket Analysis. Today I want to take a look at how Junk Bonds and US Stocks tend to peak and bottom out together. Their correlations are so high that it's just silly for stock market participants to ignore. But many still do....

The intermarket master John Murphy put out a note this week talking about just that: Stocks & Junk Bonds. He's a bit nicer to this particular asset class, calling them "High Yield Bonds", but Junk is Junk folks, no need to sugarcoat it. From Stockcharts.com:

HIGH YIELD BONDS AND STOCKS ARE HIGHLY CORRELATED... The previous three drops in the HYG (during May, August, and September) coincided with stock pullbacks (green arrows). The 60-day Correlation Coefficient (below chart) has a high reading of .94. That means that a pullback in the HYG would most likely lead to some short-term profit-taking in stocks.

It's tough to argue here with Mr. Murphy. I think this is definitely something that should be on all our radars. Here is the clean uptrend line that I'm watching in shares of HYG. We're heading towards the 5th test of this key trendline. The more tests, the more vulnerable.

I'll be watching closely.

Source:

John Murphy: Tuesday November 12 (Stockcharts)

Tags: $HYG $SPX $SPY