The setup in the junk bond market has gotten worse. And, that’s a bad omen from the broad stock market.

Last week, we looked at the setup in the iShares High Yield Corporate Bond ETF (HYG). It had just broken below its 50-day moving average (MA – blue line). That’s a bearish development.

And, unless HYG could recover right away, it would be a bad sign for the stock market.

Here we are, just one week later, and… well… let’s just say the bad sign is still hanging.

Take a look at this updated chart of HYG…

This chart still looks bearish.

HYG is trading below where it was last week. And, the shorter-term 9-day (red line) and 20-day (green line) exponential moving averages (EMA) have crossed below the 50-day MA line. This sort of “bearish cross” often signals the start of an intermediate-term decline phase.

It looks like junk bonds are headed lower. And, since the action in junk bonds tends to lead the action in the stock market – by anywhere from two days to two weeks – our stock market is likely headed lower too.

It doesn’t have to turn out that way, of course. Nothing is ever 100% certain in the market – especially not this year where we’ve seen so many things that have never happened before.

But, when you consider all of the other caution signs – like the persistently low put/call ratio, the premium price of the Volatility Index (VIX) call options, and the seasonal weakness that typically appears this time of year –
it makes sense to be a little bit cautious, or maybe even a little bit bearish here.

Best regards and good trading,

Jeff Clark

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Reader Mailbag

Have this year’s market caution signs impacted your trading strategy? If so, have you made more gains from being bearish or bullish during these volatile times?

Let us know your thoughts – and any questions you may have – at [email protected].

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