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How Junk Bonds Send a Warning to Stock Investors

See a key divergence which occurred just months before the historic 2007 stock market top

by Bob Stokes
Updated: October 10, 2019

We all know that stocks are risky.

So, if investors' appetite for risk starts to wane, it stands to reason that this is not a positive development for stocks.

Is there a way to guage investors' risk tolerance so as to get an early warning sign before stocks start to tank?

EWI's analysts believe so, and they point to the junk bond market.

You see, junk bonds are risky, too. As our analysts recently reminded subscribers, they're issued by companies with the weakest balance sheets. Investors' claim on assets in case of bankruptcy is usually next to the bottom rung, just one notch above equity holders.

With that in mind, the just-published October Global Market Perspective says:

The trend in junk bonds often aligns with the trend in equities. When the trends diverge, with stocks holding up but the value of junk debt declining, it's a powerful early-warning sign of impending trouble for both asset classes.

This latest issue of the Global Market Perspective goes on to provide subscribers with a chart that shows a historical example of such a divergence and says:

JunkBondsandStocks

A countertrend rally high in prices for high-yield bonds occurred in February 2007, three months before the intraday extreme in the financials, five months before a top in the Dow Jones Composite Average and eight months before a top in the Dow Industrials. All stock indexes then crashed into the first quarter of 2009.

Now, here's what you need to know: The October Global Market Perspective also shows a chart of junk bonds and how they line up currently with the DJIA.

Make no mistake -- this is a "must-see" chart and you will find our analysts' commentary insightful.

The good news is that you see this chart without any obligation via a 30-day risk-free trial.

Plus, you can also review our latest analysis of 40+ global markets. Look below to learn how to get started right away.

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