As some people know, I've been decidedly bearish in the recent weeks / months. I wanted to share one of the primary issues / signals I've seen in recent months, most notably since November or so. That issue is the fact that junk bonds have been diverging from the S&P 500.
Normally, Junk Bonds mirror the performance of the broader market, except their movements are slightly more conservative (less drawdowns and lower gains). This should make obvious sense as negative performance in the broader markets would lead to increased risk of defaulting. With that said, there is an old saying on wall street that credit markets are typically much quicker to see risks on the horizon, and equity markets are typically the last to the party.
One thing I (and others) have noticed, is that prior to times of economic unrest, junk bonds tend to diverge or flatten from the broader market before equity markets tend to find out what is going on. As a result, this can be inferred to be a possible leading indicator of worse performance ahead.
Given, things are always subject to change, and signals always work until they don't. Also, I'm not going to tell anyone here to make any decisions based off this, it's your own prerogative to make use of this (or any) information. But I do personally believe this signals much greater risk in the coming months.
Do note that in this graphic, I used 140% of the junk bond fund so that its performance is easier to see vs. the s&p 500.
Submitted March 12, 2018 at 12:41PM by cbus20122 http://ift.tt/2Im4mwX
