Junk bond fund repeating 1999 & 2007′s pattern?

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The Pimco High Yield fund (PHDAX) for a period of time around from 1997 to 1999 & 2005 to 2007 found it difficult to move higher, creating a series of level highs. At the same time it created a series of higher lows. Once old support was tested as resistance and it failed to move higher, large declines in junk bonds and the stock market took place.

Over the past couple of years, the fund may have created a pattern that looks similar to 1999 & 2007, as it seem to have trouble getting above the highs hit in 2007.

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The above chart of the B of A/Merrill Lynch high yield adjusted spread highlights that when sharp rallies took place in 2000 & 2007, stocks turned soft.

It might pay to keep a close eye on the Pimco high yield fund and the adjusted spread in the next few weeks, to see if any important messages come from the junk bond complex.

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10-Year Yield could move up over 150% says Joe Friday

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The Power of the Pattern suggested that interest rates were about to blast off in May of 2013, because it looked like a bullish inverse head & shoulders pattern in yields was in play. (see post here)  What happened right after that posting? Interest rates experience the largest 18-month rally in yields in the past 30-years, beating the next biggest rally by 50%! (see rate aberation here) 

Could an even larger bullish inverse head & shoulders pattern in yields be taking shape? The Power of the Pattern suggests it could be possible, if a few other developments take place.

It appears that a larger inverse H&S pattern in the 10-year yield could be forming. What needs to happen to make this huge rate rally possible? First step is to break above falling resistance in yields that has formed as rates have fallen this year. If a break of that resistance takes place, the next huge step is to see if rates can break above very stiff & heavy resistance at the neckline of this potential bullish yield pattern.

Joe Friday says.....If it does push above the neckline, the "measure move projection in rates" suggests that the yield on the 10-year note could reach almost 7%. 

Besides bonds (TLT), watch Utilities (XLU) and Real Estate (IYR) to see if these interest rates sensitive sectors reflect concerns about rising rates.

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Home Builders diverging again, similar to 2006-2007

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Almost four years ago the Power of the Pattern shared that a falling resistance line breakout would be good for home builders ETF XHB (see post here). Since the posting XHB is up almost 100%. Despite the S&P 500 doing well since 2010, XHB has out performed the S&P by 40%.

Turning the page forward, we have shared with Premium Members of late that a divergence is taking place between home builders and the broad markets that we feel is worth paying attention too.

The above chart reflects that the DJ Home Construction Index diverged against the S&P 500 for almost two years (2005-2007) before both of them fell in price together from 2007 to 2008.

The home construction index has now diverged against the S&P 500 for almost a year and a half. Humbly, I believe it is worth investors time to watch this divergence and to be careful should home builders and the broad market break support together.

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