Trend Check with Tushar Chande

High Yield Corporate Bonds Greenlight Breakout


High-yield corporate bonds are pointing to higher equity prices.  The iShares IBOXX High Yield Corporate Bond ETF (HYG) formed a nice cup-with-handle formation, broke out above the prior high, came back to re-test the breakout point, and then rallied to new highs.  This is a very powerful chart pattern, and is indicating a risk-off market environment (see Chart 1).  The VanEck Vectors International High Yield Bond ETF (IHY) paints a similar picture (see Chart2), as it responds to the strong up-moves in European equity markets.  IHY shows a high correlation to the S&P 500 index, which implies that rising equity prices have pushed these funds higher.  Thus, high yield bonds ETFs are strongly implying a risk-on market environment.  We search for the strongest industry groups responding to the high yield bond signal.


Chart 1: HYG, the iShares iBoxx High Yield Corporate Bond ETF is suggesting a risk-on environment with this powerful chart.  We see a clear cup-with-handle before the breakout, followed by a re-test of the breakout level.  Multiple new highs soon followed with good momentum, pushing the CTM above 95.


Chart 2: The VanEck Vectors International High Yield Bond Fund (IHY) is rallying to new highs. Note the high correlation to US large-cap indexes (see lower panel) and a high CTM.


US Equity Markets are Treading Water

The US equity markets (other than the QQQ / XLK) have not received the risk-off memo from the high yield bond ETFs.  The Dow 30 has yet to make a new high this month (See Chart 3) and the Equal Weight S&P 500 ETF (RSP) is moving sideways (see Chart 4).  The path of least resistance from the Russell 1000 universe roll-up reflects this split personality: the short- and medium-term path is now lower (see Chart 5).

Chart 3: The Dow 30 has traded in narrow ranges since March, and has not made a new high this month.


The Guggenheim Equal Weight S&P 500 ETF has moved laterally under overhead resistance, showing a lack of momentum.   Observe that a similar narrow consolidation in January led to an upside breakout.

Chart 4: The Equal Weight S&P 500 ETF (RSP) has moved sideways of late, showing a loss of upside momentum. (See updated chart here.)


Path of Least Resistance Turns Lower in Short-to-Medium- Term

Chart 5: The path of least resistance is lower in the short- and medium-term, flat on the intermediate-term and up on the long-term.  Please see my post on trend-following models for details.


Six Strong US Industry Groups ($BTK, $DDX, $DRG,  $HWI, $SOX, $XCI)

I used the 25-day Aroon indicator to rank the top US industry groups that are featured in the market summary.  Pharmaceuticals are breaking out ($BTK and $DRG), and computers/chips/hardware have been strong for quite some time ($DDX, $HWI, $SOX, $XCI).  So these groups are clearly responding to the risk-off environment (see Chart 6). 

I first created a chart list using the top US industry groups from the market summary available in the middle "box" in the member home page.  I then displayed the charts in a Candle Glance array.  In the available drop down boxes in the upper left corner, I chose a 6-month period and used the Aroon indicator to sort the list in descending order.  The six strongest industry groups are shown below.


Chart 6: The six strongest US Industry groups ranked using the 25-day Aroon indicator.



High-yield bonds ETFs are suggesting a risk-on market environment.  European and Brazilian stocks have responded cheerfully. However, our markets remain subdued, and we are running out of time before the June swoon.

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Tushar Chande
About the author: , PhD, MBA, is the inventor behind an impressive collection of technical indicators, including the Aroon and Stochastic RSI. He has written several books, holds both a PhD in Engineering and an MBA in Finance, and has over two decades of experience trading the financial markets. Follow Tushar in this blog as he highlights his new "Trend Meter" indicator and shares his analysis of current market conditions. Learn More
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