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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