What Does The Junk Bond Index Have To Do With The Stock Market?

David Frost // Market Outlook


November 20  

As you know, I keep a list of indicators that provide clues to what the next move in the stock market may be.

One of the more obscure indicators that most people either don’t know about or fail to realize is the Junk Bond market.

A simple proxy is the Exchange Traded Fund (JNK) which is the Barclays Hi Yield Bond ETF.

What you’ll notice on JNK daily chart below is the series of lower highs.  Why is this important?  Because the High Yield Index normally trades similar to that of stocks.  It’s all about risk.  When investors are willing to take on risk by buying stocks, the fixed income investors are also prone to step out on the risk scale by allocating some capital to the high yield index.

High Yield Bond Market

The interesting part is that the high yield index is normally a couple of weeks ahead of stocks, meaning that if this index continues to remain under selling pressure, the stock market may follow suit shortly.

As you know, I’m not looking for another large correction, but a mild one simply to work off some of the euphoria that has been building – prior to the much anticipated Christmas Rally.

As for the market action today, more of the same.  Extremely light volume, and nothing material to report in the way of S&P 500 movement.  However, our favorite market indicator was UP today.  The Russell 2000 stages a nice rally today, up over 1%.

While the Russell has had big intraday movements over the last few trading sessions, all the other major markets were near the flat line.  Interesting, but difficult to make much out of it since it’s just going back and forth.

Gold remains elevated and hovering around the $1200 level.

Crude oil staged a rally and may be headed to the $77 level indicated in last nights video.

Much more in tonight’s video.

About the Author

Trading and investing in markets is second nature to some, but a mystery to others. The goal is to provide a forum where everyday people aspiring to be part time or full time traders will learn how view markets differently and profit beyond their wildest dreams.

David Frost