High Yield Fund as a Market Indicator

Tom McCllellan (well known for the McClellan Osc. his father created as well as his own research) produces an excellent weekly email called “Chart in Focus.”  In his most recent publication, Tom discussed the rate of change indicator for a high yield fund (HIO) as it pertains to the S&P 500. Below is a recreation of what Tom discussed and as always I’ve marked past occurrences.  

From McClellan:

High yield bonds as an asset class often get lumped in with Treasury or high-grade corporate bonds.  But high yield bonds as a group tend to behave much more like the stock market than like the bond market, while also throwing off attractive bond yields.  As a result, high yield bond funds and ETFs tend to attract stock market investors who are looking to amplify their dividend yields, and they do not get the “flight to quality” effect seen in T-Bonds.

In addition to serving as an investment vehicle, high yield ETFs can also make for a great indicator of what is happening to the overall stock market. This week’s chart compares the SP500 to HIO, which is a fairly representative example of high yield bond ETFs as a group.

Generally speaking, there is a really good correlation between the SP500 and HIO, as is the case with most high yield bond funds.  But the really interesting behavior that HIO shows is how its investors tend to panic out at useful times.

The lower indicator in this chart is a 2-day percentage rate of change for HIO.  It just measures how much price change has occurred since two days before.  When we see a drop of greater than 2% over a two day period, that is usually a great sign of a short term bottom for the overall stock market. The market’s slide in May 2012 was not being fully reflected in a response by HIO’s share price until just the last couple of days.  The yield hungry investors really were not participating in the selling behavior until the very end.


Source: Flight From High Yields Marks Stock Market Bottom

Disclaimer: Everything in this post is meant for educational and entertainment purposes only. Do not construe anything written in this post or blog as a recommendation, advice, or an offer to buy or sell any securities. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.

About Andrew Thrasher

Andrew Thrasher is a Portfolio Manager for an asset management firm in Central Indiana. He specializes and writes about technical analysis as well as macro economic developments.