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Junk Bonds Are Sending a Signal to Stock Investors

Something happened just before the historic 2007 stock market top – and it’s happening again

by Bob Stokes
Updated: November 24, 2021

It's generally known that stocks are risky. It all hinges on how "hungry" investors are.

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

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

Yes, keep your eye on the junk bond market.

You see, junk bonds also carry a great deal of risk because 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. Hence, the trend in junk bonds often aligns with the trend in equities.

Here's the important point: When the trends of stocks and junk bonds diverge, with stocks holding up as the value of junk debt declines, it's usually a sign of impending trouble for stocks.

A past Elliott Wave Financial Forecast showed a historical example of such a divergence and said:

BloombergBarclays

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 in these closing weeks of 2021: Another divergence has been shaping up between high-yield (or "junk") bonds and stocks.

Indeed, our Nov. 15 U.S. Short Term Update explains why...

...the tension created by the nearly two-month non-confirmation between HYG [a junk bond ETF] and the Dow is about to become more severe.

Both the U.S. Short Term Update and the Elliott Wave Financial Forecast are part of our flagship investor package.

Follow the link below to tap into their timely insights now.

Your Portfolio: Ready for Swift Price Moves in 2022?

Get prepared for what the Elliott wave model strongly suggests is ahead for the start of 2022.

You see, the Elliott wave price patterns of key U.S. financial markets (like stocks and bonds) have already reached critical junctures.

Now get ready for very fast price moves.

Our flagship investor package -- which offers financial insights that you will not find anywhere else -- provides the details.

Follow the link below for financial peace of mind as 2021 closes out.

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All month long, Financial Forecast Service helps you stay ahead of the waves in the U.S. markets on the timeframes that matter the most. FFS covers the stock indexes, bonds, gold, silver, the U.S. dollar, as well as market psychology and cultural trends. It is our most popular service.

Comprises the monthly Elliott Wave Financial Forecast, 3x-per-week Short Term Update and at least 12x-per-year Elliott Wave Theorist.

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