McClellan Chart In Focus: Higher High for HY Bond A-D Line – By Tom McClellan


Stock prices are doing their best impression of a V-bottom rebound, even if it is a somewhat lopsided V shape.  For much of this rebound, it has been possible to argue that this is “just a bear market rally”.  The higher that prices go, the harder it is for adherents to stick by that assertion. 

The big worry is over whether the Fed can throw enough liquidity at the financial markets to overwhelm the economic damage from the Covid Crash.  This week’s chart says that the Fed is prevailing at the moment. 

High yield bonds, AKA junk bonds, trade a lot more like the stock market than like T-Bonds.  And they are terribly sensitive to liquidity, either good or bad.  So the HY Bond A-D Line can convey important information about the health of the liquidity stream in ways that the price indices might not know yet. 

When there is a divergence between this A-D Line and the SP500, it is a good idea to listen to that divergence.  Such divergences appeared twice in 2018, saying that there were liquidity problems that year.  But then after the Dec. 24, 2018 price bottom, this A-D Line made a higher high ahead of prices.  It has continued to look as strong as prices or stronger all the way up to the February 2020 top. 

It is a little bit disappointing that this indicator did not show us a divergence at that February 2020 top.  The decline from that top was not a true liquidity event, but rather a reaction to exogenous forces originating from outside the financial markets and banking system. 

Now that the market is into the rebound phase, this A-D Line is back above its 5% Trend (AKA a 39-day EMA, for those who don’t use the originalist terminology as we do).  And this A-D Line is now making higher highs.  It is not yet a new all-time high, but that is not really relevant at the moment.  It is doing well enough to be rising rapidly and making higher highs for now. 

Here is a longer term chart, showing the entirety of the FINRA dataset:

high-yield bond A-D Line

When there are really big divergences between this A-D Line and prices, that conveys a message of a bigger turning point for prices.  Such divergences appeared at the tops in 2007 and 2015, and also at the short-VIX blowoff top and crash in January 2018.  Each of those divergences led to important illiquidity events for the stock market. 

We are now in the throes of a different kind of market event, not brought about by market forces on the liquidity stream.  The Fed is meeting that threat with a torrent of liquidity, which may not necessarily be the right solution, but it is the one they are going with.  And the message from high-yield bonds is that the Fed’s efforts are working.

Tom McClellan
Editor, The McClellan Market Report

Related Charts

Jun 06, 2019 Enable Images to see this Chart

High Yield Bonds Back to Bullish Mode
Jan 24, 2019 Enable Images to see this Chart

Junk Bond Strength is Bullish For Stocks
Oct 05, 2018 Enable Images to see this Chart

A-D Line Diverging
Financial Markets and Political Commentary


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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.