Market Analysis

The Market’s Junk Problem

The market has a big junk problem and it’s very evident when taking a close look at the chart of $JNK, the high yield bond ETF. It’s been a brilliant technical indicator as of late and was one of the signals employed in fading the rally earlier in the week.

Note that $JNK has been on a steady uptrend for the better part of a year when suddenly it made a lower high in January while $SPX kept ignoring it and went on to make new highs. Not listening to $JNK was a mistake on the side of market participants. $JNK signaled trouble was brewing and once markets finally caught on it was all over.

In process of the correction $JNK broke a key supporting trend line and this proved to be a key signal this week:

Note the 2 attempts to recapture the trend line these past 2 weeks. Both attempts failed precisely at the trend line and each time produced selling in markets including this week.

What does this tell us: Firstly, technicals have worked nicely on this chart. The trend line break is bearish and the failure to recapture the trend line is bearish. Doesn’t mean $JNK won’t try again, and it if does it’ll be bullish for markets, but without a recapture it’s not good news for markets and this trend line is moving away, so bulls need a solid rally to emerge to race up there.

As long as $JNK stays above the 35.70 gap odds for a big rally are improving. Fall below the gap and markets may make new lows or retests lows.

But as long as $JNK remains below the broken trend line markets are having a junk problem.

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25 replies »

    • Yeah except junk is outperforming higher rated corporate bonds hence what you’re seeing in junk is just duration effect of rising rates not credit spread widening. Sign of strength not weakness.

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