McClellan Chart in Focus: The Chart That Worries Me: HY Bond A-D Line by Tom McClellan


Chart In Focus

The Chart That Worries Me: HY Bond A-D Line

Chart In Focus

There is no divergence yet between stock indices and the NYSE’s composite A-D Line.  But there is one in the High Yield Bonds A-D Line, and that is an early warning of big trouble to come.

High yield bonds usually trade more like stocks than like T-Bonds, and so that has led a lot of analysts to keep an eye on junk bond ETFs like HYG and JNK, especially if they show a divergence relative to stock price indices.  Those ETFs tend to be dominated by high yield bonds that are related to oil exploration, and so the price of crude oil can move them around a bit.

The High Yield Bond A-D Line is more egalitarian, looking at the behavior of all of the high yield corporate bonds as tracked by FINRA.  Each one gets an equal vote, which is why looking at A-D Lines can be useful in giving a different message than cap-weighted price indicators.  And the High Yield Bonds A-D Line in particular can give us interesting indications early on that liquidity is starting to dry up.

High yield bonds are very risky, and thus they tend to be more sensitive to changes in financial market liquidity.  We saw an example of this in 2015, when this A-D Line peaked in April 2015, well ahead of the ugliness for the SP500 which arrived later that year and in early 2016.  Liquidity seemed to have been restored just after that February 2016 price bottom, and the High Yield Bonds A-D Line shot higher to demonstrate that refreshed liquidity condition.

2007 gives us another example of this principle:

High yield bond A-D Line 2007

The SP500 had its final price top in October 2007, and we had warning of that from the NYSE A-D Line which had peaked in June 2007.  But the High Yield Bonds A-D Line peaked all the way back in May 2007, giving even earlier warning that liquidity was starting to be a problem.

Just because we have a divergence warning now does not mean that the stock market has to start downward right away.  It can take a few months before stock traders start to realize that liquidity is getting tight.  And it is also possible that a sudden gush of liquidity could lift the high yield bond market, taking away this apparent divergence.  I do not think that is going to happen, but it is possible.

This warning from the High Yield Bonds A-D Line fits well with my expectation of a significant stock market top due in March 2018.  That expectation comes from my eurodollar COT leading indication, which I discussed in a Chart In Focus article back in April 2016.  We feature that regularly in our twice monthly McClellan Market Report and our Daily Edition.

We have to wait and see whether the NYSE A-D Line confirms the liquidity concern with its own divergence.

Tom McClellan
Editor, The McClellan Market Report

Related Charts

Apr 27, 2017
Enable Images to see this Chart
High-Yield Bond A-D Line
Apr 07, 2016
Enable Images to see this Chart
Eurodollar COT Throws a Curveball
Oct 27, 2017
Enable Images to see this Chart
Bond McClellan Oscillator Almost Oversold

Financial & Political Commentary



, , , , , ,

Related Posts

About the author

Sherman and Marian's son Tom McClellan has done extensive analytical spreadsheet development for the stock and commodities markets, including the synthesizing of the four-year Presidential Cycle Pattern. He has fine tuned the rules for interrelationships between financial markets to provide leading indications for important market and economic data. Tom is a graduate of the U.S. Military Academy at West Point where he studied aerospace engineering, and he served as an Army helicopter pilot for 11 years. He began his own study of market technical analysis while still in the Army, and discovered ways to expand the use of his parents' indicators to forecast future market turning points. Tom views the movements of prices in the financial market through the eyes of an engineer, which allows him to focus on what the data really say rather than interpreting events according to the same "conventional wisdom" used by other analysts. In 1993, he left the Army to join his father in pursuing a new career doing this type of analysis. Tom and Sherman spent the next 2 years refining their analysis techniques and laying groundwork. In April 1995 they launched their newsletter, The McClellan Market Report, an 8 page report covering the stock, bond, and gold markets, which is published twice a month. They utilize the unique indicators they have developed to present their view of the market's structure as well as their forecasts for future trend direction and the timing of turning points. A Daily Edition was added in February 1998 to give subscribers daily updates on their indicators and also provide market position indications for stocks, bonds and gold. Their subscribers range from individual investors to professional fund managers. Tom serves as editor of both publications, and runs the newsletter business from its location in Lakewood, WA.