From Dana Lyons, via zerohedge.com:
This week’s Charts Of The Day and blog posts have had a heavy bearish bent to them. That isn’t by design. We just go where the data leads us and much of the data, in our view, is skewing to the bearish side for equities. Included in the concerning assortment of data are many examples of weakening stock market internals. That isn’t the only concern, however. As today’s Chart Of The Day illustrates, you can also add high yield, i.e., “junk”, bonds to the growing list. Junk bonds, as the name implies, represent the lesser credit-worthy entities in the space. Thus, they carry a higher yield that higher-grade bonds.
Because of their credit issues, these bonds often trade more closely with equities than they do with base interest rates. Occasionally, however, junk bonds and stocks will diverge with one another. Such a divergence is occurring at the moment. It is often suggested that when the bond and stock markets diverge, the bonds typically prove to be correct, i.e., the stock market usually ends up going the way of the bonds. Is there evidence to back that up? According to our research there is, at least following conditions similar to those at the present time. And, for stock bulls, that isn’t necessarily good news.
What are the conditions? Well, despite the tendency to move together, junk bonds are currently near recent lows while stocks remain near their highs. Specifically, junk bond rates (which move in the opposite direction as prices) closed at a 6-month high yesterday, as measured by the BofA Merrill Lynch US High Yield Master II Effective Yield. At the same time, as of yesterday the S&P 500 was within 1% of its 52-week high. This set of conditions has only been seen on 21 previous days going back to 1997.
To continue reading: Junk Bonds
