Courtesy of Doug Short.
Numerous times over the past 13 years, high yields funds have collectively served as a useful tool for evaluating whether stocks were about to move lower at peaks or head higher at key lows. The accompanying chart overlays several high yield funds compared to the S&P 500 index.
Back in 1998, around the time of the Russian debt crisis, high yields suggested that a frustrating period for stocks was ahead as they started reflecting major weakness. Even though the 500 index headed higher, the high yield funds were creating a series of lower highs, suggesting stock market weakness in the not-too-distant future.
As viewers can see, numerous times high yields have sent quality buy or sell signals for equities. Back in 2007, as stocks were making new highs, high yields were creating a series of lower highs, suggesting caution ahead.
Of late high yields have not rallied much since the 500 index hit a low on August 9th. This does not give a clear-cut signal at this time, yet if history is a guide, this lack of upside action in the high yields isn’t that great of message for the broad stock market. Stay tuned and keep a close eye on high yields funds, since they have been a big help in portfolio construction for the past 12 years, and I suspect they will remain a big help in constructing portfolios going forward.
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