By Mike Merson, managing editor, Market Minute
For the past three weeks, the market’s been all risk, all the time.
The Dow, Nasdaq, and S&P 500 have all made blowout moves to new highs. Hopes for a China trade deal propelled the move, of course. Just as it has for the past two years…
But if you ask me, none of this feels right. Stocks are heavy right here. Trading momentum is drying up. The price of stocks just isn’t lining up with how traders are behaving.
So, no matter what happens with the China trade deal, I think we’re setting up for one massive sell-on-the-news situation.
If you’re not positioned for that now, you may not have a better chance. And one familiar chart tells the whole story…
The high-yield bond sector is something every trader should watch every day. It’s a fantastic market-leading indicator. And a great signal for trading opportunities.
That’s because high-yield bonds are the most direct way to see the risk appetite of the market. If “smart money” traders (who tend to trade bonds) are piling into junk debt, that risk-on attitude will soon spill over into the broad market, where the “dumb money” trades. The “smart money” move leads the “dumb money.”
Now, take a look at this chart of the iShares iBoxx High Yield Corporate Bond Fund (HYG)…
The first, most pronounced thing to note is the extreme divergence on the MACD momentum indicator. For the latter half of the year, the price of HYG has risen while the momentum has shriveled up. This sort of action tends to lead to significant downturns… And the more extreme the divergence, the more severe the downturn.
The divergence that occurred between July and the end of September resulted in a 1% drawdown for HYG. (You might scoff at that… until you realize that move preceded over a 3% drawdown in the S&P 500.)
Also note that HYG just formed a “lower low” on the chart. And that’s after a number of lower highs since the peak in late October. This signals the trend is shifting into more bearish action.
Here’s what this is all telling me…
Even though hopes are high for a trade deal with China, and the dominant narrative is that a trade deal will send stocks to the moon… In the background, traders are acting differently.
Jeff has preached all week that you should be cautious of this market. I’m in firm agreement with him. Judging by how the smart money has behaved, we’re just one bad day away from what could be a nasty correction.
Managing Editor, Market Minute
P.S. Here’s another interesting idea Jeff told me recently…
When the market inevitably turns down, not every stock will fall. Instead, he reckons money will flow out of the high-flying tech stocks and into the beaten-down value stocks.
One such stock is among the three Jeff trades in his $19-per-year option trading advisory, Jeff Clark Trader. And he may make a trade on it as soon as Monday.
In Case You Missed It…
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