Bear Trend

Unless something truly weird happens, the 20 day EMA of the HYG/TLT ratio will cross the 50 day EMA downwards today. This indicator tracks the relative performance of “high-yield” (HYG, the debt formerly known as “junk”) corporate bonds and Treasury bonds (TLT). When perceived credit risk is rising, which is bearish for stocks, HYG falls and TLT rises. I use the ratio rather than the difference to remove the effect of changes in interest rates, which of course affect both classes of bonds, and then the moving averages to filter out noise. The resulting crossovers confirm intermediate-term stock market trend changes. The previous bear crossover was at the beginning of May, 2011, followed by a bullish crossover (falling credit risk, bullish for stocks) in the first week of January, 2012. This marks the end of the rally and confirms the new bear trend as far as I am concerned.

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  • stockscooter  On April 24, 2012 at 1:24 pm

    I’ll agree. I’ve got a chart of the head and shoulders on the junk market, posted on my blog. With the dollar about to ditch, imminently, this is not a good story for the markets.