Exchange traded funds indexed to high-yield corporate bonds rallied Wednesday, which is usually a bullish sign for the equities market.
However, one technical analyst notes that high-yield funds are signaling weakness as the 50-day moving average crosses below the 200-day.
The iShares High Yield Corporate Bond (NYSEArca: HYG) and SPDR Barclays High Yield Bond (NYSEArca: JNK) added more than 1% on Wednesday as they pared more of their losses from earlier this month. These bonds, known as “junk,” have higher yields to compensate investors for the additional credit risk. [ETF Chart of the Day: High Yield]
High-yield funds “can often be a great leading indicator for the stock market,” says Chris Kimble, head of Kimble Charting Solutions.
The 50-day average moving below the 200-day “doesn’t have a perfect batting average, yet the crossover hasn’t done too bad over the past few years,” Kimble wrote.
“A crossover sell signal took place back in July 2007 (suggesting equity weakness was ahead) and a crossover buy signal took place in June 2009 (suggesting equity strength was ahead). Now for the first time in four years, moving average crossover sell signals are taking place,” he added.
ETF manager BlackRock says some higher-risk sectors of the credit market such as high yield still need to see improvement on balance sheets. [BlackRock Likes Muni Bonds, Investment-Grade Credit]
iShares High Yield Corporate Bond
