From the Desk of Ian Culley @Ianculley
More pieces of the puzzle are falling into place for the bulls.
We’ve been pounding the table about the dollar and rates for months, and now they’re starting to take shape.
On Wednesday, the US Dollar Index $DXY broke to fresh lows, violating a multi-month trend line.
And interest rates… well, they haven’t moved much. They continue to hold their range after peaking in June.
As expected, stocks surged yesterday in response to a weaker dollar and stable bond market.
But stocks aren’t the only risk assets on the rise. Investors are moving out on the risk curve and bidding up high-yield bonds, too.
Here’s a dual-pane chart of the Fallen Angel High-Yield Bond ETF $ANGL and the S&P 500 Index $SPX:
![](https://media-allstarcharts.s3.amazonaws.com/wp-content/uploads/2022/08/ANGL.SPX_.png)
ANGL is one of our favorite high-yield bond ETFs because it contains the newest bonds that have been dubbed "junk." Believe it or not, these risky bonds bottomed back in June and are up five weeks in a row.
That’s not the type of behavior we see at market tops. In fact, it’s the opposite.
The last time ANGL dug in at these levels and caught higher, so did the S&P 500. It was the last week of 2018. And, if you'll remember, 2019 was a great year to own stocks, as the S&P 500 rose more than 30%.
Now, I’m not saying stocks are going on a rip-roaring rally just because investors are adding high-yield bonds to their portfolios.
I’m simply pointing out that ANGL and SPX have experienced significant bottoms in tandem twice during the past five years.
If high-yield bonds are gaining traction, that means less stress on credit markets, making it easier for companies to raise money.
This is typically a favorable environment for stocks.
Let's see what happens.
Countdown to FOMC
Following a slew of economic data since last week, the market is pricing in a 50-basis-point hike at the September meeting.
Here are the target rate probabilities based on fed funds futures:
![](https://media-allstarcharts.s3.amazonaws.com/wp-content/uploads/2022/08/image526.png)
Click the table to enlarge the view.
This data is from the CME FedWatch Tool as of August 10, 2022.
Thanks for reading. Let us know what you think. And be sure to download this week’s Bond Report!
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