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Junk Bonds Send Warning Signals That a Correction Could Be Here

Anthony Mirhaydari

U.S. equities mostly moved lower on Tuesday as hopes for the passage of the GOP’s tax reform plan fades as more lawmakers come out against the legislation as currently structured. The result was the breaking of a five-day winning streak in large-cap stocks.

Also weighing on sentiment is bubbling geopolitical tension in the Middle East, saber rattling around North Korea, and the fact that valuation, momentum, and investor confidence measures are all at extremes.

In the end, the Dow Jones Industrial Average gained a fraction, the S&P 500 lost a fraction, the Nasdaq Composite lost 0.3%, and the Russell 2000 lost 1.3%. Treasury bonds were little changed, the dollar strengthened, gold lost 0.5%, and crude lost 0.3% after Monday’s rally.

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Breadth was negative, with 1.4 decliners for every advancer, with NYSE trading volume at 114% of the 30-day average. Utilities led the way with a 1.2% gain while financials were the laggards, down 1.3%.

Valeant Pharmaceuticals Intl Inc (NYSE:VRX) gained 17.1% after reporting operating earnings 3% ahead of estimates as management said it was on track for its de-leveraging goals. Weight Watchers International, Inc. (NASDAQ:WTW) gained 13.6% on a big quarterly earnings beat and a raising of forward guidance to 11% above the analyst midpoint estimate.


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On the downside, TrueCar, Inc. (NASDAQ:TRUE) fell 35.3% on weak results and concerns about competition. Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB) fell 28.9% after Q3 earnings missed estimates on weaker-than-expected comp-store sales, lowered guidance, and concerns about dine-in trends. Blue Apron Holdings Inc (NYSE:APRN) fell 21.4% amid ongoing concerns about its business model and cash burn rate.

After the close, Snap Inc (NYSE:SNAP) — which fancies itself a “camera company”– fell more than 17% in extended trading after reporting a loss of 14 cents per share (matching estimates) on weaker-than-expected revenue of $208 million (vs. $236 million expected).

Moreover, a $40 million charge related to bloated inventory of Spectacles wearable cameras was a sign the company’s effort to pivot away from ephemeral photo chats into tech hardware has lost momentum.

It wasn’t all bad. Daily active users increased 17% YoY and 3% QoQ to 178 million. And average revenue per user increased 39% YoY to $1.17.

But the price of that growth is apparently worrisome: Quarterly cash burn totaled $220 million amid an adjusted operating loss of nearly $179 million vs. $109 million in the year-ago period. And the daily average user count of 178 million missed estimates of a rise to 180.5 million.

Conclusion


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Don’t look now, but “junk bonds” are rolling over here with the iShares High Yield (NYSEARCA:HYG) closing below its 50-day moving average for the first time since August.

Along with the breakdown in small-cap stocks to late September levels, and the most sensitive areas of the market are warning that a long-delayed and badly needed market correction could be underway.


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Keep an eye on market breadth, which is rolling over here as measured by the percentage of S&P 500 stocks in uptrends.

A return to the August lows is in order, which would be worth an 8% loss from here and, in this environment, probably feel like the end of the world.

Check out Serge Berger’s Trade of the Day for Nov. 8.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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Anthony Mirhaydari is the founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.

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