Recently, many raised a warning about high yield bonds ($HYG, $JNK), which were testing chart resistance while also in an overbought condition. Well, the time has come: junk bonds have been correcting as of late.
And as many of you know, high yields bonds are closely correlated to stock market direction. Hence, it’s very likely that we are about to see a small pullback in the stock market.
To corroborate with that idea, here is what John Murphy has written recently:
“The chart below shows a close correlation between the HYG fund (high yield bond) to the S&P 500 (black line) since the start of the year. Both have a strong tendency to peak and trough together. The previous three drops in the HYG (during May, August, and September) coincided with stock pullbacks (green arrows). The 60-day Correlation Coefficient (below chart) has a high reading of .94. That means that a pullback in the HYG would most likely lead to some short-term profit-taking in stocks.”
Another reason is the “Vix” of “Vix”… in other words, the market has been “fearless” for a while. The last two times the “VIX of VIX” was this low was in mid-August (before a 3% correction) and mid-May (before a 7% correction).