Investors are buying junk again, and that’s good news for the stock market.

The last time we looked at the action in high-yield bonds (or junk bonds) was back in mid-March

The bonds had been selling off hard.

The iShares iBoxx High Yield Corporate Bonds Fund (HYG) was down 6% for 2022 – an enormous move in three months for a bond fund.

And since the action in junk bonds tends to lead the action in the broad stock market by anywhere from two days to two weeks… it wasn’t surprising that the stock market began 2022 with a hard sell off as well.

But by mid-March, junk bonds started to show some bullish action…

Back then I wrote, “If high-yield bonds start to rally, then a stock market rally shouldn’t be far behind.”

Then, the S&P 500 gained 10% over the next two weeks.

Let’s look at the situation today. Here’s a chart of HYG…

Chart

From the April high to the May low, HYG dropped about 8% (blue arrows). That’s a huge decline for a bond fund in just six weeks.

During that same timeframe, the S&P 500 lost 14%.

But by the middle of last week, HYG was grossly oversold – even more so than at the March bottom.

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Since then, investors have started to come back into the junk bond market… HYG is trading today at about 2% higher than where it was last week.

Granted, that’s not a huge move yet – especially considering the size of the recent decline.

But it’s the first bullish action we’ve seen in the junk bond market in the past six weeks. And it’s a sign that investors’ appetites for risk may be improving.

Junk bonds may be telling us that a significant, intermediate-term bottom is nearby.

And if high-yield bonds can build on this week’s strength, then a stock market rally shouldn’t be far behind.

Best regards and good trading,

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Jeff Clark

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In today’s mailbag, new Earnings Trader member Michael thanks Jeff for his insights…

Hello Jeff,

I’m brand new to trading options and just purchased your Earnings Trader service. I have followed your Market Minute for two years. Thank you for your great service and terrific market insight. I find your sector predictions to be very accurate. Well done!

It’s not easy getting approved to trade options… I’m still waiting for my account to be approved for trading anything beyond buying and selling puts. As I learn more from your videos and alerts, I’m getting very excited to buy and sell call options.

– Michael P.

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