Tags: Krinsky | junk | bonds | stocks

Miller Tabak’s Krinsky: Junk Bonds Falling, Stocks May Follow

Friday, 08 Feb 2013 01:40 PM

By John Morgan

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A drop in junk bond prices may be flashing a warning sign that stocks are about to fall, according to Jonathan Krinsky, chief market technical strategist at Miller Tabak.

Krinsky told Yahoo that junk bond exchange-traded funds (ETFs) and the Standard & Poor’s 500 usually track one another closely.

But lately the two have been going in opposite directions — the iShares iBoxx $ High Yield Corporate (HYG) ETF and SPDR Barclays High Yield Bond (JNK) ETF are headed down, while the S&P is still on an upward tear, he noted.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

“When they start to diverge, it brings up a yellow light,” Krinsky said. In the past, junk bonds have been known to “roll over” a few days before the S&P, he added.

The divergence is still early and may mean nothing at this point, Krinsky said, but sometimes it pays to be cautious.

“Make sure it’s not a canary in the coal mine. Take a step back,” he said.

“When you see stocks making fresh 52 [week] all-time highs, you’re always looking for that situation that makes you take a pause. This is one of those situations.”

Krinsky also mentioned to Yahoo Breakout a possible second ETF trend that is pointing to potential stock market weakness. He noted that since 2009, the Consumer Discretionary Select Sector SPDR (XLY) has outperformed the Consumer Staples Select Sector SPDR (XLP). But now the XLP, a more defensive name, is starting to show more relative strength, he said.

An article in Barron’s this week agreed with Krinsky’s assessment. The sudden downturn in high-yield corporate bonds should give investors a “wake-up call,” Barron’s said.

“While it is not unusual for any market to pull back after a few months of strong gains, this market’s departure from other so-called ‘risk assets’ could be an early warning that the recent strong run in the stock market is in jeopardy,” Barron’s reported.

Veteran fund manager Dan Fuss, who oversees the Loomis Sayles Bond Fund, told Bloomberg last month he is negative on the fixed-income market in general.

“High-yield is as overbought as I have ever seen it,” Fuss said. “This is absolutely, from a valuation point, ridiculous.”

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

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