If you've followed this blog or on twitter, you know for months I've been pointing to this major rounding top in the bond market risk ratios. These tops are all across the bond risk curve. For more, refer to this post from Mid-March.
If you're not familiar the HYG / LQD ratio is simply a measure of junk corporate bonds to quality corporate bonds. We want to see smart money betting on risk to be bullish (IE this ratio move higher), but that's not the case here. Simply put, bond market players are starting to walk away from risk at a faster pace.
I'll admit I've been very early and suggesting it means anything until it does has been very wrong. This is possibly the most important, blatant inter-market signal I've seen and just couldn't ignore it.
The current tone seems to be we should brush the market's weakness off as a a mild pullback. Of course we all feel that way, the market has gone nearly straight up for 20 months now. We know it never ends up how the majority think it will.
The one year length of this pattern does NOT suggest a run of the mill pullback, it suggests a cyclical bear market is possible with a meaningful de-risking period coming soon. For comparison, this top is 3x the size of the top in 2011.
Whether or not that comes to fruition is yet to be seen, we'll all know soon enough. I'll leave you with a few questions I'd be asking as a reader (w/answers).
Am I looking only at this 1 indicator as I drop the term cyclical bear market in this post? Not at all..more on that this weekend.
Hey fear monger guy, why come out with this now after the dow was down 300 points? Because this break down is confirmed after breaking the July low.
Ok asshole, what are you doing with YOUR accounts? Trading the levered sectors ETF and sector options. I also own a couple of small cap and china stocks.
Does this mean a lot more for the bond market than stocks? Possibly, but history suggests they go hand in hand.
Will there be trading opportunities in both directions? You bet.
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