Wednesday, February 6, 2013

Junk Bonds Flashing a Warning Signal for Equities?

From Yahoo Finance and video after the jump....

One of the most elusive and fickle trends that professional investors constantly refer to is risk appetite. You've surely heard the terms "Risk-on" and "Risk-off" used to describe how willing (or reluctant) investors are to play in traffic, so to speak, and take on the uncertainties of the market. While stocks are off to a great start in 2013, at least one trend watcher says he's picking up warning signs that the good times might be coming to an end.

Looking at the relationship between the S&P 500 and the relative price of the Barclay's High Yield Bond Fund (ticker JNK) and the IShares Investment Grade Corporate Bond Index (ticker LQD), you can see the divergence the commentators in the video from link were talking about.


So is this the beginning of the end of the rally? I know I am getting mixed messages. If you have followed my price/volume diffusion index commentaries you would have seen that that their appears to be some momentum strength behind this move, but that this rally may be getting into the twilight stages. Additionally, I have seen evidence (for instance, GDP growth at stall speed, a drawdown in the acceleration/deceleration in employment, and more) that suggests that the risks of a recession are increasing. I have also noted this a few times, but the demand trend here do not seem to be enough to push prices through the November and December 2007 supply lines shown in the volume levels on downdrafts more than five years ago.

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