The Junk Bond ETF broke its bearish trend five weeks ago. Rosy times ahead?

The strength of the economy is of grave importance to stock traders because the stock market sinks when the economy is in recession. The most recent examples are 2006 – 2008 and 2000 – 2002. While the stock market has headed up since mid February, the fundamentals have steadily deteriorated.

  • The ratio of inventory to sales has been increasing for more than three straight quarters. It has never been this high without they’re being a recession
  • Worldwide trade has crashed pushing the price of shipping to historic lows.
  • Capital Expenditures have also crashed. Used gigantic shovels, used in mining, that used to cost $500,000 now costs $50,000.
  • The cost per average share of the S&P is 18% below the 2014 level.

Historically, bonds tend to sink in advance of the stock market. John Murphy “Technical Analysis of the Financial Markets” says bonds change trend between 6 and 18 months before stocks. This time around, with central banks around the world foisting zero and often negative interest rates has inexorably led the a mad dash for yield. This has pushed the price of the U.S. 30-year bond and U.S. 10-year note to insanely high levels (i.e., the higher the price of the bond the lower the interest rate). The interest rate on the 10-year note was recently 1.7%!

The junk bond market is the first part of the overall bond market to crack because the leading wave of the gigantic deflation that is just beginning has hit investments funded almost entirely by junk bonds. One example is the fracking in South Dakota and West Texas where there have been waves of bankruptcies already. In light of this, is the recent breakout in junk bond prices a sign of rosier times ahead? Or, more likely, just a technical pause on a continuing deterioration?

Here’s the chart of the weekly junk bond ETF:

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