If you’ve kept up with the Market Minute this week, you know Jeff has been warning that the current bullish phase for the broad stock market is nearing its end.
To recap: The S&P 500 gained about 30 points from the Monday open to its Thursday peak of about 3020. But it stalled… It went basically nowhere on Friday, closing at 3007…
In the end, the S&P gained just half a percent this week.
And now, for reasons I’ll explain today, the next most likely move is down.
The VIX options “crystal ball” Jeff showed you Friday was our first clue. When traders are willing to pay more for VIX calls than the equivalent puts, they’re betting on an increase in volatility. That’s generally bad news for the broad market.
But what has me convinced is the action in the high-yield bond sector.
The iShares iBoxx High Yield Corporate Bond Fund (HYG) – which Jeff took a look at Wednesday – shows the risk appetite of the market. The more that investors pile into risky high-yield corporate bonds (junk bonds), the more likely it is that the broad stock market will climb.
But right now, the risk appetite is waning. Here’s the chart…
Note that this is a 15-minute chart of HYG. Since it’s a shorter timeframe, any patterns we spot on this chart are likely to play out in the very near future – no more than a couple days.
The first thing we can see is the clear negative divergence on all the momentum indicators (MACD, RSI, and CCI). The indicators have all moved lower while the price of HYG moved higher. So, the momentum behind this week’s move is drying up.
We can also see that on Friday, HYG set both a lower high and a lower low from its peak on September 12. That suggests a change in trend for the very short term.
Remember, the S&P 500 ran up to 3020 on Thursday, then stalled. So to see HYG breaking down from its high of the week, ahead of any downside action in the broad market, is a strong warning sign.
Like Jeff said Wednesday, we won’t have a true decline signal from HYG once it breaks through its 9-day exponential moving average at around $87.09. But as of yesterday’s close, we’re only about 7 cents away from that level.
I’m willing to bet that a downside move on Monday will get us there.
Plus, we can’t forget that the Federal Open Market Committee has an announcement on interest rates on Wednesday. The market tends to be quite volatile leading up to those meetings…
Stock market bulls are likely in for a couple of days of pain early this week. Traders sitting on profits from the recent rally should look to take the gains off the table, and consider adding some short exposure, early on Monday.
Managing Editor, Market Minute
P.S. Every trader should keep an eye on market-leading sectors like HYG. Doing so will put you ahead of a vast majority of traders… In fact, another similar sector inspired the trade in this week’s Delta Report.
Out of respect for Jeff’s paid-up subscribers, I can’t reveal it here. But the trade is still a buy in the Delta Report portfolio… and Jeff sees more than 150% upside from here.
To learn more about a Delta Report subscription, and the wealth of trading knowledge Jeff brings to his subscribers every day, click here.
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