JNK Is Rolling Over – That Is a Warning Sign

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JNK 9.9.14

JNK Is Rolling Over—That is A Warning Sign

JNK, the junk bond ETF, accurately forecast the July/early August decline in the stock market. Now, it’s rolling over again—providing a potential warning sign that we may be in for another dip.

In the July 22 issue of the Report, we included a chart that showed how junk bonds had broken a 2014 uptrend, and warned it could be a negative sign for stocks.

Likewise, we kept watching JNK as the leading indicator for the stock market during the late-July/early August sell-off. We pointed out on Aug. 13 that JNK was close to breaking back above resistance at $41 and, if successful, could signal an end to the stock sell-off.  JNK did break resistance, and over the next week the S&P 500 rallied 50 points in a straight line …

So, to recap:

  • JNK topped on 6/23/14.
  • SPY basically topped on 7/3, 11 days after JNK.  (The SPX did make a nominal new high on 7/24 but really the market was chopping for those three weeks.)
  • JNK declined -4.21% peak to trough, bottoming on Aug. 1.
  • SPX declined -4.25% peak to trough and bottomed on 8/7, one week after JNK.

So, JNK peaked and bottomed one week before SPY, and the declines were almost identical.

And, while nothing in the market is 100% guaranteed, it sure seems like JNK acted as a leading indicator for stocks.

And, that makes sense fundamentally.  If we are going to see a decline in stocks, it’s going to be due to fears about the Fed getting too hawkish, which will come with higher rates.  And, when rates do start to rise, junk bonds will get hit the hardest because they are the sector of the bond market that is the most overbought, thanks to years of QE and the subsequent reach for yield.

Turning to the present, JNK is rolling over, as the chart on pg. 1 shows.  JNK peaked on 8/26 and is now down 4 days in a row, again below support at the $41 level.

Point being—JNK acted as a leading indicator for stocks 2 months ago, and I believe it’s continuing to do so now.  Does that make me outright bearish on stocks?  No, you can’t fight this tape and have to respect the rally.  But, it is a warning sign we need to monitor, and it may be an indication that we’re in for another sell-off in the coming weeks.