We have another bearish divergence calling strike three on the stock market rally…
High-yield bonds $HYG versus US Treasuries $IEI.
Check out the HYG/IEI ratio (dark blue line) overlaid with the S&P 500 ETF $SPY:
We use the HY bond-to-US Treasury ratio to track credit spreads. When the dark blue line falls, credit spreads widen – a sign of dwindling liquidity and stress for the bond market (the world’s largest market).
Stocks tend to struggle as credit spreads widen.
On the flip side, when these spreads contract (or the HYG/IEI ratio catches higher) stocks rally as capital flows into risk assets. That’s why these two lines trend together.
Notice the HYG/IEI ratio and SPY bottomed last October before rallying into the spring, following a similar path to new highs.
Silver is underperforming Gold. The corrections in Platinum and Palladium are burrowing deeper beneath our breakout levels. And the Gold Miners ETF $GDX is printing fresh lows versus the broader market.
I’m avoiding the US dollar and interest rate chopfest.
That includes interest rate-sensitive commodities like crude, copper, and gold.
So, let’s check in with a commodity group that walks to the beat of its own drum…
The New York City Softs: Cocoa, Coffee, Cotton, and Sugar.
First up, Cocoa.
I’m sure you’ve seen Cocoa’s 45-year base breakout to new all-time highs:
Cocoa futures have been the main attraction, showcasing a face-ripping rally reminiscent of the 1970s.
In the 70s, Cocoa experienced two 400-plus rallies, each spanning approximately two years trough-to-peak (December ‘71 to April ‘74 and June ‘75 to August ‘77).
Cocoa might have another explosive rally in the tank!
For now, it’s bouncing between two critical extension levels:
The Nasdaq is ripping to new all-time highs. NVIDIA’s market cap is surpassing the three-trillion-dollar mark. And US T-bonds are registering another buy signal.
But the market’s still a mess.
Just look at yesterday’s intraday reversal—a bullish reaction to inflation data in the morning, followed by a bearish reaction to the FOMC meeting in the afternoon. Investors are still trying to make sense of the mid-week hoopla.
Friday’s close (the most important data point of the week) will reveal critical information regarding market conviction heading into the weekend.
Meanwhile, you can track high-yield bonds for risk-on confirmation.
Check out the HY Bond ETF $HYG overlaid with the high beta-versus-low volatility ratio (using the $SPHB and $SPLV ETFs):
