Weakness In High Yield Bond Signals More Volatility Ahead for The
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High yield bond (also called junk bond) is often used as a risk-on or risk-off sentiment indicator. However, as high yield bond is very sensitive to the market liquidity, it is a reliable indicator to give early warning of the potential liquidity problem in the stock market.
Refer to the chart below to find out how the high yield bond (HYG) behaves when there are tapering of the bond buying program and quantitative tightening by the Federal Reserve (Fed).
Pullbacks (highlighted in pink) with relatively large magnitude were seen when HYG struggled to go up to catch up with S&P 500. The divergence together with the meaningful pullbacks in HYG signaled the red flags in the S&P 500. Subsequently, S&P 500 experienced a 12% correction off the peak in 2015, 2018, and 2022.
In 2014 the Fed’s taper of the monthly bond-buying program responding to the global financial crisis in 2008, ran from January until October 2014, lasted 10 months. In 2018, the Fed conducted quantitative tightening in order to shrink its balance sheet.
Both the tightening of the monetary policy by the Fed caused the market correction of more than 10% with increasing of volatility as reflected in the trading range formed in the S&P 500 in 2015-2016 and 2018-2019.
Now, apart from tapering the bond-buying program scheduled to end in March 2022, the Fed is also considering quantitative tightening to shrink the balance sheet. On top of that. a rate hike is likely to happen in March 2022.
The fast pace of tapering, tightening, and raising rates are expected to stir up more volatility in the stock market, which is currently unfolding where S&P 500 just had a steep correction in January 2022.
Prior to the sharp correction in S&P 500, high yield bond (HYG) already gave early warning by producing multiple meaningful pullbacks on top of the divergence with the S&P 500.
In the past 3 weeks, despite the market rebounded off the oversold condition, the sell-off in high yield bond (HYG) continued, which could point to more weakness ahead in S&P 500. In order to better predict the short-term trend of S&P 500, Wyckoff method is adopted for detail analysis below.
S&P 500 Price Prediction with Wyckoff Method
Based on the Wyckoff phase analysis, S&P 500 had a selling climax (SC) in 24 January followed by an automatic rally (AR), which is a technical rally after an oversold condition. 4550-4600 (as highlighted in red) is the resistance area where the previous breakdown happened, which is an important level to overcome for a bullish up swing. Refer to the chart below:
Last week there was an attempt to breakout from the resistance zone at 4550-4600 yet failed with two bearish bars with increasing of volume, suggested presence…
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