There’s a cop car parked next to a stop sign at the bottom of a hill in my neighborhood.
Nobody is in the car. It’s just parked there – with its red and blue lights flashing – for several hours every day.
The idea is that, even though there’s no cop around and there’s no immediate threat of getting a ticket, the flashing lights will remind drivers to slow down and be a little more cautious. And it worked – at least for the first few days the cop car was parked by the stop sign.
Drivers got used to the cop car being there – without the cop. They got used to the flashing lights. So, they went back to driving carelessly and just rolling through the stop sign.
Yesterday, the city put a cop in the car. He tells me he wrote 12 tickets in his first two hours on duty.
The moral to this story is that even though there’s no immediate or evident threat of getting a ticket, drivers should still pay attention to flashing lights.
And so should investors.
In today’s stock market environment, the high-yield bond sector is the proverbial cop car parked next to the stop sign. The iShares iBoxx High Yield Corporate Bond ETF (HYG) has been flashing its warning lights for the past few weeks. Yet nothing has happened. There’s no cop in the car.
So, investors aren’t paying much attention to HYG anymore. HYG broke down in early November and hasn’t been able to recover. Junk bonds are badly underperforming the action in the broad stock market. And, in the past, such action has been a precarious sign for stock prices.
Two weeks ago, I advised traders to keep an eye on the chart of HYG. It provides a glimpse to the health of the “risk-on” environment. As long as buyers are stepping up to buy junk bonds, then investors have an appetite for risk and stocks are likely to keep pressing higher.
But if HYG starts to fall, then it’s an indication that “risk-on” may be shifting to “risk-off.” And stocks may start to struggle.
Well… here’s an updated look at HYG…
HYG has been acting poorly for the past several weeks. It’s trading below both its 9-day exponential moving average (EMA) and its 50-day moving average (MA). And the 9-day EMA is below the 50-day MA.
This is a bearish formation. For investors, it’s the flashing red and blue lights on top of the cop car. It’s telling you to slow down and be a little more cautious.
If HYG can somehow manage to rally and break above its 50-day MA, and if the 9-day EMA can cross back over the 50-day MA, then we’ll be back in “risk-on” mode.
Until and unless that happens, though, it’s best to proceed with caution.
You never know when the cop will show up.
Best regards and good trading,
Jeff Clark
Reader Mailbag
Today, readers respond to yesterday’s Minute, “How I Know We Have a Winning Trade”…
I don’t get some of the complainers about your trades. A winning percentage of 70% makes you a rock star in the trading world… you are at 80% this year!
I paid $250 per quarter to another service that when I looked at their book of trades they were at 50% over the last two years… I canceled my subscription. I am even more conservative than you with a put selling strategy that has a win rate over 90%, but the gains are small. I hit a lot of singles and doubles.
What I really like about your service is that I use it to compliment what I do and increase my ROI. You can’t complain about one or two losing trades… make all the trades and manage them smartly.
– Bob B.
This is my first time writing to you. I made good money on both the Macy’s and BBBY recommendations. In fact, I sold Macy’s puts more than once and ended up owning the stock for a while. I then sold calls on the shares I held and the stock was called away at a profit.
I am currently holding several gold/silver positions including GDX which I chose to let be exercised rather than roll forward. I was fortunate to sell puts at a much better price than your recommendation due to a time lag on getting to read that suggestion. It seems like your expectation for rising gold stock prices got started nicely yesterday. Some people will always struggle with the contrarian mindset, but those of us who have followed you for some time know that it works. Keep up the great work!
– Michael C.
It is fascinating to see the comments from subscribers. These are a great reminder that even investors who should be savvier often fall into the herd mentality trap.
I find Jeff’s advice direct, honest and a great place to garner more information. The more I read, the more apparent it becomes that you can find anything written to support any forecast. Your suggestions are well thought out and have great merit. My only suggestion would be to incorporate more spreads to limit risk. There is a clear relationship between risk, reward and the statistical chance of each trade’s success.
– Jack G.
As always, feel free to send in your trading stories, questions, and suggestions right here.