The high-yield bond sector was on the verge of breaking down last week. And since the action in high-yield bonds typically leads the action in the broad stock market by anywhere from a couple of days to a couple of weeks, a breakdown in junk would be a bad sign for stocks.
But the market somehow kept its junk together. Look at this updated chart of the iShares iBoxx High Yield Corporate Bond Fund (HYG)…
On Wednesday last week, HYG was sitting right on the support of its 50-day moving average (MA) line. And the 9-day exponential moving average (EMA) was on the verge of completing a “bearish cross” by crossing below the 50-day MA.
If that had happened, it would have likely kicked off an intermediate-term decline phase for HYG – which would have led to a decline for the broad stock market.
But instead of breaking down, HYG exploded higher. And the bulls bought themselves a little extra time.
HYG closed at an all-time high on Friday. And by doing so, it has given stock market bulls another life.
The 9-day EMA on this chart has turned higher, and it has created some distance between it and the 50-day MA. So, it’s going to take at least several days – and maybe as much as a few weeks – to create another potentially bearish setup.
Granted… Friday’s action in the stock market has created some overbought conditions. And the look of the Volatility Index (VIX) and the pricing structure of the VIX options suggest we could see a quick decline over the next day or two. But we’re not going to get a meaningful pullback in stocks until we first get that sort of pullback in HYG.
That’s going to take more time.
So, right now, after HYG failed to break down last week, the bulls have recaptured the momentum. The stock market is overbought in the short term. We’ll likely see some weakness early this week in order to relieve that condition. But the odds now favor at least one more push higher after the overbought conditions are worked off.
Best regards and good trading,
P.S. Remember, if you have any questions about the market, suggestions for the Market Minute, or stories about great trades you’ve made, send me an email right here.