‘Near Perfect’ Indicator That Precedes Almost Every Stock Market Correction Is Flashing A Warning Signal

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By Michael Snyder, on December 4th, 2014

(SOURCE)  Are we about to see U.S. stocks take a significant tumble?  If you are looking for a “canary in the coal mine” for the U.S. stock market, just look at high yield bonds.  In recent years, almost every single time junk bonds have declined substantially there has been a notable stock market correction as well.  And right now high yield bonds are steadily moving lower.  The biggest reason for this is falling oil prices.  As I wrote about the other day, energy companies now account for about 20 percent of the high yield bond market.  As the price of oil falls, investors are understandably becoming concerned about the future prospects of those companies and are dumping their bonds.  What is happening cannot be described as a “crash” just yet, but there has been a pretty sizable decline for junk bonds over the past month.  And as I noted above, junk bonds and stocks usually move in tandem.  In fact, junk bonds usually start falling before stocks do.  So does the decline in high yield bonds that we are witnessing at the moment indicate that we are on the verge of a significant stock market correction?

That is a question that CNBC asked in a recent article entitled “Near perfect sell signal says stocks should drop“…

The S&P 500 and the iShares iBoxx High Yield Corporate Bond ETF are a mirror image since the start of the year, but since the end of October, high yield has diverged to the lower right, and yet the S&P 500 has continued to record highs. Since separating in October, the S&P 500 is up 3 percent, while the high-yield ETF is down 4 percent.

On 10 occasions since 2007, the high-yield ETF dropped 5 percent in 30 trading days. During nine of those instances, the S&P 500 fell as well, with an average return of negative 9 percent, according to CNBC analysis using Kensho.

Only once did high yield give a false sell signal. That was last year, when the market was already entranced by the Federal Reserve’s quantitative easing program, which has seemed to elevate stocks with an abnormal consistency. And even then, the S&P 500 managed just a 0.4 percent climb amid the junk debt rout.

Personally, I am convinced that this correlation between junk bonds and stocks is very significant.

Let’s just go back and look at what happened during the financial crash of 2008 for a moment.

In the chart posted below, you can see that high yield bonds began crashing in the middle of September that year…

High Yield Bonds 2008

But U.S. stocks did not crash at the same time.  In fact, the chart below shows that they did not really begin crashing until early October…

Dow Jones Industrial Average 2008

That is why analysts often refer to junk bonds as a “leading indicator”.  What happens to high yield debt is often a really good indicator of what is about to happen to stocks.

Now let’s take a look at what is happening today.

Since the beginning of November, junk bonds have been falling steadily…

High Yield Bonds November

Meanwhile, the Dow has continued to reach new heights…

Dow Jones Industrial Average November

This is not a state of affairs that can persist indefinitely.  Either junk bonds will rebound or U.S. stocks will start falling.

If the U.S. economy was on solid footing, you could perhaps argue that it could go either way.

Unfortunately, that is not the case.  At this point, the stock market has become completely divorced from economic fundamentals.  Price to earnings ratios are at absurd levels, margin debt is hovering near record highs, and the “real economy” continues to fall apart.  We are enjoying a massively inflated standard of living which is being propped up by the largest mountain of debt in world history, and it is only a matter of time before reality starts catching up with us.

And the signs of our long-term economic decline are all around us if you are willing to look at them.

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2 thoughts on “‘Near Perfect’ Indicator That Precedes Almost Every Stock Market Correction Is Flashing A Warning Signal

  1. As you know Gordon, I have been sensing that the next and what I believe will be the final scenario to happen for the beginning of the last days or the tribulation period is the collapse of the worlds economies, because the anti-Christ will take a chokehold on economic trade and buying and selling by total control with a number system (666) This is not something that I desire to happen, yet the way it’s going it is unsustainable especially from an energy control and employment picture. Our nation is going into some sort of a “high oil binge” with regards to the amount of oil that we are now producing. Shale deposits in the Dakota’s are being refined with technology to produce oil, fracking is a new technology upping production, and oil drilling in general has exploded with the infusion of huge amounts of money from both the government and private hedge funds. This is a plan falling into place to eliminate about 150 coal burning electrical plants in the country engineered by the radical environmental agenda that controls our president and his energy policies. This policy is going to affect about 20 coal producing states in a drastic devastating way economically. There is about to be an entire generation of an employment sector related to all things coal wiped out of our economy taking millions of jobs with it, thus destabilizing our economy further. The nation and the world is becoming an unmanageable nightmare when it comes to energy supplies and usage. A nightmare that only Jesus can and will straighten out when He sets up his kingdom, a time when fields will be planted and harvested and not drilled and ravaged. “maranatha”

  2. I agree Ethin. Economic collapse will be another sign ushering in the Tribulation, as well as division of the church, apostasy, forming of a one world religion which is already happening, persecution of true Christians in America, forming of a one world government, which is already in the works at the United Nations.

    America will stand divided as is happening now, part of Obama’s plan. America will fall economically and as a global super-power, also part of Obama’s plan. Also part of Satan’s plan, makes you wonder who Obama is working for?


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