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 above introductory comments are edited excerpts from an article* by Michael Snyder (theeconomiccollapseblog.com) entitled ‘Near Perfect’ Indicator That Precedes Almost Every Stock Market Correction Is Flashing A Warning Signal.
Snyder goes on to say in further edited excerpts:
High yield bonds are steadily moving lower primarily because of falling oil prices, and 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.
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? [It seems so.] On 10 occasions since 2007, according to CNBC analysis using Kensho, the high-yield iShares iBoxx High Yield Corporate Bond ETF dropped 5% in 30 trading days and, during 9 of those instances, the S&P 500 fell as well, with an average return of -9%.
Personally, I am convinced that this correlation between junk bonds and stocks is very significant, and a look back at what happened during the financial crash of 2008 bares that out. In the chart posted below you can see that high yield bonds began crashing in the middle of September of that year but that 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 which is why analysts often refer to junk bonds as a “leading indicator” as 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…
Meanwhile, the Dow has continued to reach new heights…
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 but, 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…These days so many people are in denial. The stock market has been soaring for so long that many skeptics are now proclaiming that another 2008-style crash will never happen.
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Even though the fact that we are in the midst of an absolutely insane financial bubble should be glaringly obvious to anyone with half a brain, the above referred to skeptics have convinced themselves that the current state of affairs can persist indefinitely. Sadly, it looks like what is about to hit us in 2015 is going to serve as a very rude wake up call for them and for the millions of other Americans that currently have their heads in the sand.
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://theeconomiccollapseblog.com/archives/near-perfect-indicator-precedes-almost-every-stock-market-correction-flashing-warning-signal (Copyright © 2014 The Economic Collapse)
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