Investors should keep an eye on weakness in high-yield exchange traded funds because the riskier bond ETFs have been a decent leading indicator for the stock market, a technical analyst says.
SPDR Barclays Capital High Yield Bond (NYSEArca: JNK) and iShares iBoxx $ High Yield Corporate Bond Fund (NYSEArca: HYG) have both fallen below their 50-day exponential moving average.
“Breaking below a 50-day exponential moving average is not that concerning of a message,” says Chris Kimble, head of Kimble Charting Solutions, which specializes in technical analysis. Yet should high-yield funds and ETFs break the 200-day EMA “a very concerning message would be at hand,” he added.
The high-yield or “junk” ETFs invest in corporate debt and both funds have 30-day SEC yields of more than 6%. These corporate bonds can be more volatile than investment grade government debt.
“We consider investing in high-yield corporate bonds to be similar to investing in the equities of companies with highly leveraged balance sheets,” said Morningstar analyst Timothy Strauts in a profile of SPDR Barclays Capital High Yield Bond.
“With increased leverage comes the increased probability of default and bankruptcy,” he added. “In the grand scheme of things, risk equals return, and the high yield of these bonds is designed to compensate investors for this risk.”
High-yield funds have been great assets to own when above key moving averages, as well as a fairly reliable indicator for stocks, Kimble said. He noted the category peaked in 1998 before the broad market started its decline from 2000 to 2003. “They started heading lower in 2007 before the broad market and put in a low in the fall of 2008, before the broad market did in March of 2009,” Kimble added.
With high-yield funds crossing below the 50-day EMA and the steep support line breaking, they are “sending a ‘note of caution’ to the equities marketplace, that hasn’t been sent in months,” he said in a recent blog.
iShares iBoxx $ High Yield Corporate Bond Fund
