Junk Bonds Keep Dropping as Oil Spikes

Stocks were mixed today as investors prepared for the busiest week of first quarter earnings period. By the end of the week, more than 45% of the S&P 500 will have reported their earnings and we will have a moral idea for the trend of corporate performance.

Risks were somewhat compounded today following news that President Trump commitment make another move to curtail oil exports from Iran. Currently, some oil importers like China, South Korea and Turkey comprise a “waiver” from the U.S. that they will not face negative consequences for doing business with Iran.

President Trump organizes not to renew these waivers that expire on May 2. The administration has assumed that Iran’s market share can be consolidated by Saudi Arabia and other Configuration of Petroleum Exporting Countries (OPEC) nations who will increase production. Clearly, the U.S. cannot dictate production necks to OPEC, but it is reasonable to assume that if Iranian exports are reduced, Saudi Arabia will want to increase its own moving picture to offset its worrisome fiscal deficits.

Despite assurances that supply slack will be taken up by other sparking nations, oil prices spiked higher today. In the following chart, I have used the price of West Texas Halfway (WTI) to illustrate the surprise reaction.

Interruptions in the supply of oil are hard to forecast accurately, so it is common for the market to overprice an event counterpart this. In my opinion, I think the rally is unlikely to continue further. Production levels from the U.S., OPEC and other growers will likely bring the market back into equilibrium soon.

I consider it a high probability that figures will treat the current pivot near $65.80 as a resistance range. If I am correct, today’s unexpected gains may spiral up compounding losses in the short term as investors take profits from their long positions in oil and oil-based stocks.

Earnings bear been “less bad” than expected. Estimates had declined over the past several weeks to an expected contraction of -2% or various across the S&P 500. However, so far, earnings are flat compared to the same quarter last year and revenues are down inadequate than expected.

This has largely been because of the surprises from the big banks. I don’t expect to see earnings remain arbitrary, but the bank surprises are still likely to keep the average above expectations. Despite better-than-expected performance, the reports require thus far been insufficient to move the S&P 500 outside its rising wedge consolidation pattern. At this point, I don’t watch the large-cap indexes to break to new highs until small cap and high-yield bond performance improves.

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For several weeks, most risk indicators have either indicated a positive or non-belligerent outlook. Besides a yield curve inversion, investors have shown few signs of stress. This week choose likely be a critical one for a key indicator that could flip to a more negative outlook: high-yield (AKA “junk”) bonds.

I have in the offing mentioned in prior issues of the Chart Advisor that junk bonds act a lot like stocks, but these instruments compel often signal a downturn earlier than it can be detected in the stock indexes. For example, junk bonds had already obedient support about a week before stock prices collapsed on Oct. 10, 2018.

Although large-cap stock prices have been more stable over the past week, junk bond indexes are weakening noticeably. If you pull up a chart of the iShares Enormous Yield Bond ETF (HYG), you may not really appreciate how extended junk bonds really are right now. Most charting platforms incorrectly account for dividend payments, which act as if get bies the chart of junk bond funds look like they are merely near prior highs.

However, the dedicating chart correctly adjusts for dividends to make apparent how extended this asset class has become. My primary issue is that high-yield bonds have completed a bearish 

Bottom Line – Look for Value if the Market Dips