Thursday, September 19, 2013

Junk Bonds Suggesting a Major Top…Jobless Claims

Chart from Yahoo Finance at

High Yield Bonds tend to act like stocks since they are sensitive to economic conditions.  Junk bonds fall as the default risk of issuers increases.  While they are not immune to interest rate hikes (that lower bond prices), they are considerably less sensitive to interest rate fluctuations than most bonds.

So if junk bonds act like stocks, what can we glean from the above chart that shows the performance of the TR Price High Yield Fund (in blue) vs. the S&P 500 (in green)?  First, in 2007 the stock market peaked when the S&P 500 outperformed junk-bonds by about 55%.  We find similar results looking at charts from the dot-com crash.  At the top in September of 2000, the S&P 500 outperformed junk bonds by about 75% before the S&P 500 collapsed. 

Currently, the S&P 500 is outperforming junk-bonds by about 70%. 

A second point has to do with duration of recovery and we only need to look at the plot of the S&P 500.  The time from the low after the dot-com bust (September 2002) to the high before the financial crisis was 5-years.  Projecting forward from the last major low in March 2009 would put the next top in March 2014. (Historically, the duration of bull-rallies in secular bear markets has only been 26-months on average from 1907 to 2007, but they didn’t have an activist FED in the “old” days.  For Market History see the NTSM blog at...

Junk bonds and stock market history are suggesting a major top…possibly within the next several months.  What is currently missing is a catalyst for the downturn.

“Applications for unemployment benefits climbed by 15,000 to 309,000 in the week ended Sept. 14 from a revised 294,000 in the prior period, a Labor Department report showed today in Washington. The median forecast of 53 economists surveyed by Bloomberg called for an increase to 330,000…“The labor market is genuinely improving,” said Brian Jones, senior U.S. economist at Societe Generale in New York. “Even if they’re working through the backlog, these numbers seem to have a little bit more behind them than just processing problems.’”  Full story at…

There were issues again with the reporting of the claims data so the numbers are somewhat suspect.
“The Federal Open Market Committee defied widespread forecasts that it would announce the beginning of a cutback in its $85 billion-a-month purchases of Treasury and mortgage bonds. The reasons: The economy is still too weak, and inflation remains below the Fed’s target….The only dissent came from Esther George, president of the Federal Reserve Bank of Kansas City, who “was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations”…The next chance the FOMC will have to cut back bond-buying comes on Oct. 29, the start of its next two-day meeting.” Story at…

Thursday, the S&P finished down 0.2% to 1722 (rounded) at the close.
VIX fell 3% to 13.16.

The 10-day moving average of stocks advancing on the NYSE was 61% at the close.  (A number above 50% for the 10-day average is generally good news for the market.)  

New-highs outpaced new-lows today, Thursday, leaving the spread (new-hi minus new-low) at +313 (it was +288 Wednesday), with the 10-day moving average of change in spread positive. 

The Internals are positive on the market in the short term.

Thursday, the overall long-term NTSM analysis remains HOLD at the close, but indicators improved and may actually turn positive on the market.  The last BUY in my NTSM system was on 1 Feb 2013. (That has to be a record for the longest period without a BUY signal.)

Volume is positive on the market while other indicators are neutral.

I remain about 20% invested in stocks as of 5 March (S&P 500 -1540).  The NTSM system sold at 1575 on 16 April.  (This is just another reminder that I should follow the NTSM analysis and not act emotionally – I am under-performing my own system by about 2%!)  I have no problems leaving 20% or 30% invested.  If the market is cut in half (worst case) I’d only lose 10%-15% of my investments.  It also hedges the bet if I am wrong since I will have some invested if the market goes up.  No system is perfect.