How’s The Market’s Appetite For Risk?

I hope you did not miss my annual write-up about the upcoming Chinese New Year, Year of the Metal Rat.

As mentioned, this year the fire element is completely absent.

Raymond Lo (my go-to source) says that pessimism, cynicism, and despair will set in and contribute to an economic decline.

Clearly, starting the week with reported cases of the coronavirus sparked some of today’s pessimism.

Yet if Lo is correct, without the fire element and with an abundance of water, the virus might have been a catalyst, but not necessarily the main reason we could see further declines.

A few weeks ago I featured junk bonds.

“High-yield junk bonds are attractive when the anticipation is for lower rates for a longer timeframe. Furthermore, the price of junk bonds will rise if the anticipation is that these weak companies will improve.

Junk bonds in general, serve as one indicator for investors’ appetite for risk”.

With Nasdaq 100 making yet another new all-time high early on while closing lower, has this rally now turned into the world of expensive junk?

(Click on image to enlarge)

I’ve rarely shown you all trendlines, as I typically look at moving averages and chart patterns.

However, the trendline on this weekly chart of JNK is extremely useful.

The black line near the ellipse extending to the recent price action is a valid trendline.

Weekly charts help us to step back and see the bigger picture.

Therefore, the trendline on the weekly chart that dates back to the beginning of 2018 and extends to today tells a story.

The 2018 high for JNK was 111.15.

The 2019 high was 109.99. And the 2020 high thus far is 110.33.

The price stopped right at the trendline last week.

Today, it closed red.

At this point, we cannot say this is a failure of the trendline and the end of the appetite for risk.

What we can say though, is that 110 is pivotal. A move over 110.33 will indicate a breakout with more upside to come.

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