Prepare For The Bond Implosion Now With This ETF

By | May 14, 2019

Bond yields continue to reflect a risk-off environment. It has been that way for a long time but when that docile dynamic starts to reverse, it could accelerate quickly. Traders should be prepared to profit from the machinations of the “bond vigilantes,” and higher yields.

Jeffrey Gundlach, of DoubleLine Capital has been warning about corporate debt in particular for years. The “bond king” calls it an “ocean of debt,” that will create a problem for the stock market.

It is impossible to say when the reversal will come and the degree of havoc that will be wrought, but traders should be prepared to profit from it.

One way would be to buy the ProShares Short High Yield (SJB) fund. The fund seeks daily investment results that correspond to the inverse of the daily performance of the Markit iBoxx $ Liquid High Yield Index.

Let’s go to the weekly chart.

At the top of the page is the iShares iBoxx $ High Yield Corporate Bond ETF (HYG). It is up about 10% from its December 2018 low, but several warning signs have appeared in the price action.

Note the recent doji star candles. A doji is a candle with narrow opening and closing range. It suggests indecision and after a long uptrend or downtrend, the possibility of a shift in investor sentiment. It is a potential reversal candle.

When multiple dojis form after a strong move they increase the likihood of a reversal. Three consecutive doji candles are called a “tri-star” pattern which is a strong reversal signal. That is not currently the case because we’re looking at a weekly chart and the last candle is not completely formed. But keep a careful eye on this week’s candle.

Below the HYG chart is the ProShares Short High Yield (SJB) chart. Remember it corresponds to the inverse of the high yield corporate index. It correctly looks like a mirror image of the HYG. The previous dojis on this chart suggest the potential for a low of some duration, and an eventual shift in the trend.

The moving average convergence/divergence indicator for the SJB is making a bullish crossover. The crossovers on this chart have, in the past, been infrequent and generally last over the intermediate term to long term.

The bottom line is that the level of corporate debt remains high. When rates inevitably begin to rise and prices start to fall, the SJB will head higher, potentially much higher. Be vigilant and be prepared to profit.

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