Date: June 15, 2018

Canaries in the Coal Mine Part III – The Others

The final group of canaries don’t have anything in common. I just grouped them together to avoid having three more small canaries. Let’s start with high yield (junk) bonds which I write about very often on the blog. I like to use one of the exchange traded funds (ETF) ones as well as one from the mutual fund space.
Right below, you can see JNK which is one of the two major high yield bond ETFs. It peaked in early January. Just below that chart, you will find PHYDX which is a PIMCO’s giant high yield mutual fund. It, too, peaked in early January which is technically not so bad, however I am very concerned about the depth of the decline that ensued and high yield’s inability to rally very much since. While I do think high yield will rally this month and into Q3, I believe there is a good chance that the January peak for this all-important canary could mark the bull market high. If that’s the case, the stock market will have lost an important canary for quarters or perhaps even years to come.

The New York Stock Exchange Advance/Decline Line (NYAD) is next and it is important because it shows the levels of participation in the bull market rally. 90% of all bull markets deaths show a NYAD canary that was dead at least three months before prices started to roll over. In other words, the NYAD is a very good leading indicator that will sometimes give false warnings, but rarely fail to warn. It usually pays to watch for times when stocks are making new highs and this indicator is not.
Below you can see that at the January peak, the NYAD was scoring fresh new highs. As has been the theme of this whole issue, this is absolutely not the type of behavior usually seen at bull market peaks.
Finally, somewhat similar to the NYAD, we look at the percent of stocks above their average price of the last 200 days. Bull market typically end with significant weakness beneath the surface over the long-term. That means the line below should be going down well before price see their final highs and the number should certainly be less than 60%. At the January stock market peak, 75% of stocks were trading above their 200 day long-term trend.
Summing it all up, as has been the case during every single stock market pullback and correction since the bull market launched in March 2009, the bearish pundits have been dead wrong. The preponderance of the evidence strongly suggests new highs for the stock market which I have been forecasting all year, above Dow 27,000. I still have an upside projection to Dow 30,000.

Paul Schatz, President, Heritage Capital