High Yield funds have been great leading indicators for the equities markets. On 6/20, I highlighted that several funds were breaking below their 200EMA lines for the first time since 2007. (see post here). I felt this was important to share with viewers since most of us are well aware what followed the 200EMA breakdowns in 2007!
On a more of a macro point of view I want to share this…. Numerous times over the past 13 years, high yields funds have collectively served as a useful tool for evaluating whether stocks were about to move lower at peaks or head higher at key lows. The accompanying chart overlays several high yield funds compared to the S&P 500 index.
Back in 1998, around the time of the Russian debt crisis, high yields suggested that a frustrating period for stocks was ahead as they started reflecting major weakness. Even though the 500 index headed higher, the high yield funds were creating a series of lower highs, suggesting stock market weakness in the not-too-distant future.
What followed the 1998 lower highs, high yield message? Stocks have only struggled on a “Buy, Hold & Hope” basis for the next 10+ years!
CLICK ON CHART TO ENLARGE
As viewers can see, numerous times high yields have sent quality buy or sell signals for equities. Back in 2007, as stocks were making new highs, high yields were creating a series of lower highs, suggesting caution ahead. On the flip side-High yields put in their lows in 2002 before the 500 did so in 2003 and they did it again in October of 2008, months before the 500 hit a low in 3/09.
Of late high yields have not rallied much since the 500 index hit a low on August 9th. This does not give a clear-cut signal at this time, yet if history is a guide, until they start moving sharply higher, this lack of upside action in the high yields isn’t that great of message for the broad stock market.
Stay tuned and keep a close eye on high yields funds, since they have been a big help in portfolio construction for the past 12 years, and I suspect they will remain a big help in constructing portfolios going forward.
