U.S. Markets closed

Are Junk Bonds Warning That Stocks Are About to Fall?


One of the most elusive and fickle trends that professional investors constantly refer to is risk appetite. You've surely heard the terms "Risk-on" and "Risk-off" used to describe how willing (or reluctant) investors are to play in traffic, so to speak, and take on the uncertainties of the market. While stocks are off to a great start in 2013, at least one trend watcher says he's picking up warning signs that the good times might be coming to an end.

"The high yield (HYG) and junk bond (JNK) ETFs track the S&P 500 very closely," says Jonathan Krinsky, chief market technical strategist at Miller Tabak, in the attached video. "But when you see them start to diverge, it just brings up a yellow light," he says, adding that it ''just makes you wonder, why is the S&P still rallying?"

As much as he says this divergence is early and "could mean nothing," Krinsky also says the trend resembles previous meltdowns and is just good policy to heed such things. "When you see stocks making fresh highs you're always looking for that situation that makes you take a pause. This is one of those situations."

At the same time, Krinsky says a second divergence is underway, which also suggests that the tolerance for risk-taking may be waning.

"Since the 2009 lows, the Consumer Discretionary (XLY) has been, by far, the best performing sector as it tends to be a risk-on type of trade," he says, but "when you see the Consumer Staples (XLP) start to show some relative strength versus the discretionaries, that gives you a bit of a pause."

Again he stresses that "this could mean nothing" but also says these two trends could mean investors are starting to shift into more defensive names to brace for a little bit of a pause or pullback.