As of Friday, December 22, 2017 at the close of trading EquitySurge™ has continued a strong sell signal for USA equities.
It’s been more than a month since we’ve last posted, and the stock market has gone on to make higher highs to just below the 2700 level on the SP500 Index.
However also during that time the performance divergence between High Yield Bonds and the SP500 Index has grown to more than 10 percentage points, a level that historically results in an equalization between the two, in this case making it highly likely for the SP500 Index to decline by the difference, 10 percent, to close the gap between the two.
Hard to believe? I’m sure coming from us who have been bearish the entire straight up bull market that has been 2017 it is. But consider that High Yield Bonds represent one of the best measures of liquidity in the stock market, i.e., money flow into or out of stocks, and this performance divergence becomes very, very meaningful.
If High Yield is bringing us the message that liquidity conditions in the stock market are indeed drying up, then at a minimum at least some profits from the move higher in stocks this year should be harvested during this “Santa Claus” rally period that almost always marks a positive move in stocks leading into Christmas and New Years.
If you are willing to hear a counter-trend message, then hear this: we have not seen High Yield in a more bearish configuration since the Spring and early Summer of 2015, the period leading up to the August 19-24, 2015 rout in the stock market that sent the SP500 Index down more than 12 percent over that trading week. A 10 percent sell-off from today’s current levels of around 2700 would equal approximately 2400. You ready for that if it happens?
Here is the performance difference between the SP500 Index and High Yield as represented by the HYG ETF over the past 200 trading days:
Remember the tried-and-true old adage, Buy Low and Sell High… Merry Christmas and Happy New Year to all!
If you would like to review the EquitySurge™ trading signals generated in 2016 and so far in 2017 please see the Trading Signal Performance Chart page.