Whew, that was a close one.
Let me explain…
Two weeks ago, junk bonds were just breaking down.
The iShares iBoxx High Yield Corporate Bond ETF (HYG) had fallen below its 50-day moving average (MA) line.
Since the price action in high-yield bonds tends to lead the price action in stocks by a few days, we warned earlier this month…
Unless HYG can recover immediately and climb back above its 50-day MA, it looks like it’s headed for lower levels.
And, if junk bonds are headed lower, then the stock market is headed lower too.
Since then, HYG has recovered. It has been rallying for two weeks straight. And, the fund is now trading back above all of its various moving average lines.
This action has helped put a bid beneath stock prices.
The S&P 500 – which was on the verge of breaking down along with junk bonds two weeks ago – is also back above all of its various moving averages. In fact, the index is within spitting distance of a new all-time high.
A stock market crisis has been avoided – for now…
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But, we’re not quite out of the woods yet. After all, we’re still in October – a month known for bearish market action. And, junk bonds could still break lower.
Take a look at this updated chart of HYG…
If you look closely at the circled area of the chart, you’ll notice that while the price of HYG is just above all of the various moving average lines, those lines are still set up in a bearish formation.
The 9-day exponential moving average (EMA – red line) is below the 20-day EMA (green line). And, the 20-day EMA is below the 50-day MA (blue line).
In order for this chart to turn bullish, the shorter-term moving averages (red and green lines) need to cross above the 50-day MA.
That sort of action would confirm a bullish move… It would suggest that HYG has started a new, intermediate-term rally phase, and that would be bullish for the stock market.
For the moment, though, we don’t have that confirmation.
HYG has recovered from the early October decline.
But, that recovery hasn’t been strong enough, yet, for the moving averages to complete a bullish cross. HYG needs to continue to move higher in order for that to happen.
Instead, if HYG starts falling again, then all of the moving averages will turn lower and HYG will confirm it’s still in a decline phase. And, that would be bearish for the broad stock market.
Traders should keep watching this chart. The action over the past two weeks has been constructive. But, it could still go either way from here.
Best regards and good trading,
In today’s mailbag, Market Minute subscriber Kevin thanks Jeff for his commentary…
Jeff, your commentaries like this one are always a joy to read and resonate so well with anyone who has attempted trading at some time in their life. Thank you for all that you do to describe successful trading in terms we all have come across each day. It’s a pleasure to be a subscriber. A fellow Kansan.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].