High Yield Exhaustion

Posted on November 30, 2012 by Andrew Thrasher — 4 Comments ↓

With Treasury yields at historic lows investors have gone after yield in other segments of the market, the high yield bond market is often one of the places investors seek out in that chase for income. Today we are going to take a look at the iShares High Yield Corporate Bond ETF (HYG).

With the rally in equities, HYG has also seen its price rise, taking it back to September and October highs. Many technicians argue the validity of a triple top, but what I want to focus on is the exhaustion that appears to be happening in the high yield ETF. As HYG has gotten near the $93 level we’ve seen momentum, based on the Relative Strength Index (top panel), diminish. Each attempt to make a new high appears to be accompanied by fewer and fewer buyers. With yesterday’s price action taking us just a few cents under the previous level of resistance, the RSI is also a hair below the October level, and well under the September level in momentum.

We can also see that each rally was done on declining volume. When traders take a security to new highs or levels of resistance, they often look for heavy volume to be present. Large volume tells us that there is a lot of demand for shares, which we don’t seem to be seeing in HYG. Instead, each rally attempt has been on dying volume, giving traders less confidence that resistance can be broken.

With that said, there is still some hope for HYG. As I wrote yesterday, this market is currently swaying to the words of Congress. If we get a debt deal then there’s a definite possibility that the $93 level can be taken out and bulls will maintain in control.

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

High Yield Fund Calling for A Bounce

Posted on November 1, 2012 by Andrew Thrasher — No Comments ↓

It appears that we might be due for a short-term bounce from the current levels. The past three trading days have almost been mirror images of each other, producing three doji candles on the S&P 500 chart, which is a sign of indecision and could put in a small bottom for equities. It would make sense, at least to me, that we not break right through 1400 on the first attempt. It seems like 1420 is still acting as a level of resistance on any potential rally we get in the next few days but I’m not convinced we will power through to new highs.

Below is a chart of the Western Asset High Income Opportunity Fund with a 2-day Rate of Change (ROC) indicator in the top panel. Back in May Tom McClellan produced the same chart in his “Chart in Focus” weekly email. I reproduced the chart on May 21st when we were near 1300 on the S&P, calling for at least a short-term bounce.

Well what we saw in May is not taking place today, with the ROC indicator breaking below -2. As you can see below (green dotted lines mark past occurrences), this doesn’t always concur with a market bottom, but it does seem to coincide with at least oversold bounces.

I really enjoy Tom McClellan’s insights and glad he shared this chart a few months ago. We’ll see what kind of momentum the bulls can build up.

Source: Flight From High Yields Marks Stock Market Bottom

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything written and/or displayed here is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+.

High Yield Fund as a Market Indicator

Posted on May 21, 2012 by Andrew Thrasher — No Comments ↓

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.