Junk Bonds and Stock Market

As posted on the Gary Smith thread below, we have had a sharp rally in junk bonds and so the question arises what does that tell us about the stock market and what are the chances for a continued junk rally. Junk has predicted the major bear markets of the last decade. In 2007 junk started a sharp decline in June-July several months before the stock indexes peaked. Back in 1999 when stocks were soaring junk trended down before stocks hit the fan in 2000. Right now junk shows two white candles on the monthlies and that indicates a very important juncture. During the decline in junk that ran all the way from 1998 to 2002, junk had rallies that lasted typically two months then died and all those rallies came at year end (Nov.'98, Nov.'00, Nov'01). The one time that junk held up and did not turn down commenced in October '02 and while stocks were revisiting lows in the first quarter of '03 junk continued to rally anticipating the cyclical bull of '03 to '07. Bottom line (as Lee48 posted), if Junk holds up in here while stocks turn down on low momentum that could be a significant positive signal for both stocks and junk. But if this turns out to be another junk hiccup, then watch out below. You can see these trends on the following open end junk funds - phdax, prhyx, vwehx, fhiix, gshax, opchx, lshix.

Would any 1 or 2 of the funds you posted be considered more of a "bellwether" than the others? I've been using GSHIX for awhile and have wanted to add a couple more.

U.F.O.

Hello UFO, I used open-ends because they have history dating back to 1997. For shorter history I'd follow the etf hyg although it's alot more volatile than open-ends. Of the funds listed, Gshax(same as Gshix) Prhyx, Phdax, and Fhiix track very close over one and five years. Opchx definitely should be tossed for tracking purposes. Cefs vary a lot due to volatility and fund size. Interestingly, the largest cef, Phk, went to the depths on leverage issues and since those have been somewhat (sort of) resolved PHK rose more than 100% - not a standard for tracking! Best,

ds: excellent post, thanks. that's what the fast money is watching and exactly what we should be watching. we are at an important inflexion point. a few days higher and the ripple will become a buying wave in stocks. so, the question becomes: what are the chances of a swoon in the high yield? with the FED buying MBS and lending on everything else, there is very, very little chance of a relapse. and i don't think the FED will be happy until those funds get back up to their august level.

Edited by humble1, 11 January 2009 - 05:20 PM.

Go Fed! Will they issue debt under the quotron symbol USJNK?

Just a couple of random comments tied to this post and Gary's other post. 1/ The NYSE composite has two sectors in it called Bond CEFs and Preferred Issues. Gary mentioned the CEFs. If you extract these issues, their Index prices now would probably be viewed by most as bullish. 2/ Looking at the Pref'd Index, the following attributes have occurred. Closed several days above it's 256 day simple moving average this week and is still above. Peaked out about 150 pts below it's Sept 3rd high, and that is a 95% retracement of the plunge. It also formed a perfect double bottom with the two closing prices within 20 pts. 3/ Looking at the CEF Bonds, the following attributes have occurred. This past week it closed two days above the Oct 1st close. It is still ~10% below it's 256 day simple MA, and about 15% below the Sept highs. In summary, the CRASH wave and subsequent retesting process on these two indexes mimic the 1998 Dow bottoming process pattern wise, although the price damage was FAR greater. 4/ Moving outside a bit of the thread's theme, if we look at the equally weighted values of the Common Only stocks in the NYSE, we see continued bullish trending action. The 3 day correction has still left this Index above it's simple 10 and 20 day moving averages, along with the 55 day EMA. Lot's of interesting action going on. Have a good evening.