The stock market broke out to the upside last Thursday. Then it stalled.
We were only about 10 minutes into the trading day Thursday morning when the S&P 500 tagged the 2975 level. It has been stuck there ever since.
Oh sure, the index has been a few points higher and a few points lower. For the most part, though, it has been four straight days of “go nowhere” action.
Usually, following the type of big move we saw on Thursday morning, the stock market might consolidate for a day or two, work off any overbought conditions, and build energy for another move higher. But, the longer it takes for that next move to get started, the less likely it is for the rally to continue.
So, as the stock market traded lower yesterday morning, lots of talking heads were on the financial television networks suggesting that Thursday’s breakout move was over and stocks would soon start heading lower.
I disagree. There’s still more upside left to this breakout move. Not a lot, but enough to justify waiting a bit before loading your portfolio with short positions.
Let me explain…
The action in high-yield bonds (a.k.a. junk bonds) tends to lead the action in the stock market by anywhere from two days to two weeks. And, the action in junk bonds so far this month has been undeniably bullish.
Look at this chart of the iShares iBoxx High Yield Corporate Bond Fund (NYSE:HYG)…
HYG closed at a new all-time high yesterday. It’s quite unlikely that the broad stock market will fall sharply while investors are still willing to put money into risky assets like junk bonds at all-time-high prices. It’s also trading above both the 50-day moving average and 9-day exponential moving average – another bullish sign.
So, as long as this chart of HYG continues to hold up, there’s more upside ahead for stocks.
Last Thursday’s breakout to the upside for the S&P 500 was for real. I continue to think the index will rally up to the 3,000–3,020 level before this rally phase is over.
But, traders should keep a close eye on this chart of HYG. It will provide an early signal for when the stock market is ready to decline again.
Best regards and good trading,
Jeff Clark
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