The HY bond market has a good history as a leading economic and equity market indicator. As Jeffrey Gundlach pointed out today, “They’re falling apart.” Our high yield model triggered a short-term trade signal (sell) several weeks ago. Safely positioned in cash or Treasury Bills, we believe a better opportunity is ahead of us.
Let’s take a look today at a long-term trend chart (13/34 Week Moving Average measure), a weekly chart and a daily chart.
Below is the overall cyclical bear market trend (red arrow far right). Note the dominant bull market trend from early 2009 to July 2015 (with the exception of two short corrections in 2011 and 2014). Note the growing length of the current bear trend (vertical red line markets the change in trend). That is where the 13 week MA dropped below the 34 week MA). This looks serious folks.
On a weekly basis, HYG is below its 200-day moving average line (red line). Let’s see what this Friday’s week ending close brings us (yellow highlight – red arrow). Focus on the middle three blue lines: A 38.2% Fibonacci retracement of the 2009 to 2015 gain puts a correction target at 69.44 (blue line). A 50% retracement puts HYG at 63.39. I can make a technical argument for a 61.8% correction putting HYG at 57.35. There are a lot of prior highs and lows at all three blue lines so let’s call long-term support somewhere between 57 and 70. On a percentage basis, a loss of 20% to 35% in principal. In my view, a reasonable risk assumption.
Further, on a daily basis (next chart), note yesterday’s close below the December 2014 bottom (red horizontal line). This too is technically bearish. Or, depending upon which lens you view this through, opportunistic as lower prices will bring higher yields and better total forward return potential. In 2008, the yield on HY bonds moved to nearly 20%. Prices had crashed. If one remained invested, they lost both principal and the opportunity to buy back in at high yields.
Back then, I wrote a piece entitled, “It’s So Bad It’s Good.” Fear was high. We’ve been running our tactical HY strategy since the early 90’s. We took advantage of that opportunity for our HY clients. Of course, past performance means nothing. etc… no guarantees in this business. The important point is that opportunity often doesn’t look like opportunity when it presents. Stay patient and tactical with HY today. See coming opportunity, not despair.
See more in Trade Signals – High Yield Bonds Are Breaking Down.. By Steve Blumenthal. See important disclosures.
The current opinions and forecasts expressed herein are solely those of Steve Blumenthal and are subject to change. They do not represent the opinions of CMG. CMGs trading strategies are quantitative and may hold a position that at any given time does not reflect Steve’s forecasts. Steve’s opinions and forecasts may not actually come to pass. Information on this site should not be used as a recommendation to buy or sell any investment product or strategy.