High Yield Barometer is suggesting what for stocks in the near future?


 Last fall when investors were way too bearish and running for the hills, driving the VIX sky high and piling into cash (see post here), high yields were reflecting relative strength and the Power of the Pattern was suggesting that this set up was a good sign for the stock market! (see post here)

Since the late 1990’s, high yield mutual funds have been an awesome barometer to what equities could do in the near future.  I wanted to bring this up due to a couple of situations in the high-yield complex right now.

A couple of observations from high yields…of late, they continue to reflect relative strength, as they have outperformed the S&P 500 by almost 5% in the past 90 days (see inset in above chart).  They are now facing a key test of resistance at (1).   If the message from the high yields is a good barometer….they need to start reflecting relative weakness before the stock market is in real trouble! 

If you are an investor that wants to load up on short positions and make money from a stock market decline, you might want to see some proof/weakness from the high yields before betting the farm on a huge stock decline.



  1. Doesn’t the fact that high yields made lower highs in 2012 compared to 2011, while the SP500 made higher highs in 2012 already reflect relative weekness?

  2. Belsha…as always, awesome observation!

    That is why the falling resistance, in my humble opinion, becomes very important!


  3. looks as if the S&P is really struggling to stay inside of that flag pattern. Do you think yesterdays action dropped below support? It’ll be interesting how the market responds with high yield showing this relative strength.

  4. Just like the Down Jones Transportation Index, Russell 2,000, SP400 (Mid Cap Index), SP600 (Small Cap Index)New York Stock Exchange (NYA), WTI Crude Oil, VLE (Value Line Index) and about 50 other sectors and sub-sectors like JNK all failed to take out the highs of 2011 even though the SP500, NASDAQ and DJIA made higher highs. The fact JNK failed like all those other sectors and averages (Dow Theory as well not being confirmed by the Transports underperforming) are flashing much greater warning signs than the bearish divergence that lasted just a few months in the chart above back in 2007. This bearish divergence in JNK from 2011 to 2012 along with all the others mentioned is much more significant and broader in scope and price. The longer the divergence between all these instruments both in time in price will lead to a much greater fall is what it’s really saying.