Junk Bonds Diverging, Could Send Bearish Message To Stocks

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This charts takes a 25-year look at the Pimco High Yield mutual fund. In 1999 & 2007 the fund was diverging against the S&P 500 and once it broke support the fund and broad markets turned weak together.

At this time PHDAX is now testing 4-year support and it has been diverging against S&P for almost a year!

Below looks at the two most popular junk bond ETF’s against the S&P 500

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This chart reflects that JNK & HYG are diverging against the S&P 500 over the past year, by almost 10%!  In the past, junk bond divergences sometimes were a caution signal for the future of stock prices. Will it be different this time?

With the S&P nearly flat on the year, one might want to keep a close eye on the junk bond complex to give you an idea of where the S&P 500 could be at year end!