High yield mutual funds have been very good tools/leading indicators for the stock market.  Last summer/fall I shared the chart below because something jumped out at me…”stocks were struggling, creating a series of lower highs, yet high yield funds were expressing relative strength!” (see post here)  

This was one of the tools, along with very bearish sentiment that made me comfortable with going long stocks at the September lows (see post here) and shorting bonds at the September highs (see post here).  

FYI- The chart below was posted on 7/15/2010 (see post here)


What are high yields funds suggesting now?



The stock market is at the lower end of a trading range, its been in since early August, yet these high yield funds are actually reflecting relative weakness! In the chart above the funds are now breaking below the 2010 lows.  No tool is the holy grail, yet these have done rather well for the past decade plus at determining quality entry and exit points to the equities market. (see 12 year high yield leading indicator post)

So what is the macro message coming from the high yield complex?  Weak companies in the states are getting weaker!  Can stocks rally in the face of the high yield decline?  Yes.  Are high yields suggesting you can buy stocks here and “buy, hold and hope” will work well?  Based upon the action of high yield funds and If history is a guide, Not yet! 

What could bounce well in here?  If you are aggressive how about looking into the quiz of this past week? (see post here)  FCX fell over 100% more than the 500 index during its 20% decline.  The large decline in FCX took it down to a crossroads of support. 

Using high yields as a tool, until their price action improvesrallies are counter trend!

How The Recent Decline In Stocks Looks "Eerily" Like Major Bear Markets Of The Past