The high yield debt chart is very troubling IMO. If we overlay the S&P 500 and the high yield debt chart, a huge bearish divergence is revealed. Check out this chart with the red line being the S&P 500 and the purple line being high yield debt.
High yield debt (purple) is nowhere near hitting its previous high on October 24, 2016. The S&P 500 (red) has exploded past its October 24, 2016, high. High yield debt and the S&P 500 markets have formed a bearish divergence.
Ask yourself, why are bond traders afraid to invest in riskier high-yield bonds right now? If things were going to be so great for the economy with Trump in office, why aren’t bond traders piling into riskier high-yield corporate bonds? The divergence between high-yield bonds and the S&P 500 support my down at first, up later on outlook. However, my down at first, up, later on, forecast is in the intermediate to long-term time frames while HYG is used for short-term week-to-week swing trading in the stock market prediction algorithm.
With the yield on safer risk-off Treasury bonds rising, bond traders are increasingly turning away from riskier high-yield bonds.
Gabor Zolna agrees with my assessment that the current stock market rally is based on nothing but hype and he warns that when the big guys cash out, the little guys will crash out. Check out Gabor Zolna’s stock market commentary:
Folks we have to be real. Donald Trump may be good for the economy a year or two down the road. I hope Trump will be good for the economy. The mainstream media always tries to find meaning in market action. We saw the mainstream media wrongly claim that the market was going up before the election because Hillary Clinton’s odds of winning climbed to 70%. I told you that wasn’t true. How does the mainstream media know the minds of millions of traders around the world? They don’t. They just try to find meaning and then publish something so that you’ll read it but the reality is no ones knows why the market does what it does. The mainstream media reacts to the market. That’s why before the election it was Hillary’s rising odds of winning that was driving markets higher. After the election, it’s now a Trump Rally that’s pushing markets higher. Wait a second. That’s the opposite of what they said was driving markets higher before the election! The mainstream media attempts to find meaning in markets by REACTING to them. As traders, we must ANTICIPATE the market. As traders, we can’t afford to react to the market because we’ll always arrive at the party late.
Make sure that you keep tight stops in place and that you don’t buy into the Trump Rally hype.