S&P 500: Short-and Long-term Risk vs Reward Analysis

it happened again: The S&P 500 erased a month worth of gains in just 3 days. Being aware of the up side potential compared to down side risk is always a good idea, but especially now.

Let’s objectively assess bullish and bearish factors to determine up side potential vs down side risk for the short-and long-term.

Up Side Potential – Short-term

The October 20 Profit Radar Report published the S&P 500 futures chart below and stated that: “A close above 3,002 (blue triangle) could eventually lead as high as 3,187.75 (3,167.74 for S&P 500).

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The S&P 500 came within 12 points of this target and then dropped 84 points in 3 days (as projected, see last chart of this article). Based on the above projection, near-term up side potential is limited.

Up Side Potential – Longer-term

On November 25, the VIX closed below 12 for the first time in 3 months. Over the past 20 years, this has happened 8 other times. 1 year later the S&P 500 traded higher every time (the blue lines below highlight the instances since 2013).

On November 25, the Russell 2000 reached a new 52-week highefor the fist time in a year. Over the past 20 years, this happened 5 other times. 1 year later, R2K traded higher 4 of 5 times.

For the first time since August 2018, the monthly MACD histogram for the NY Composite crossed above 0. The blue lines below highlight times when the MACD histogram exceeded 0 for the first time in a year. This signal was rare (only 6 times since 1980) and always followed by gains 1 year later (on average 16%).

Short-term Down Side Risk – Short-term

The November 24 PRR mentioned that VIX hedgers held a record amount of VIX positions and warned: “The last two times this happened, the VIX spiked and S&P 500 took a nasty spill.”

From November 27 – December 3, the VIX soared as much as 50%. This may have satisfied the need for a VIX spike already, but more could still be to come.

Longer-term Down Side Risk

The November 20 PRR noted that: “Unlike stocks, junk bonds have been trending lower. The chart below plots the S&P 500 against the SPDR High Yield Bond ETF (JNK). The blue boxes highlight other periods where JNK trended lower while the S&P trended higher. It usually and eventually led to stock market pullbacks of various degrees.”

It is difficult to put a time-frame on this ‘setup’ as the bearish divergence could be followed by weakness sooner or later.


When compiling my forecasts I look for ‘signal clusters.’ Those are times when indicators and studies coherently suggest a specific performance over a certain time frame.

Right now, a cluster of bullish studies suggests that stocks will be higher about 1 year from today.

Another cluster of indicators projects lower prices over the next 3 month. This cluster, however, is in conflict with the strong momentum market we’ve seen since early October.

In short, the weight of evidence suggests that pullbacks over the next 3 month are an opportunity to buy.

The yellow projection below, published in the December 1 Profit Radar Report, outlined a path in harmony with a number of indicators.

As you can see, the projection correctly captured the decline from 3,150 to below 3,100. Another rally to the high is quite possible and – if all goes according ‘to plan’ – should be followed by another pullback, potentially a much deeper, but also temporary one.

Continued updates, projections, buy/sell recommendations are available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s evaluation of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.

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What Does the Junk Bond Meltdown Mean for Stocks?

In the land of the blind, the one-eyed man is king.

In the land of low interest rates (ZIRP), high yield junk bonds are king. Never mind the additional risk. At least that’s how it used to be.

But reality has a tendency to make unexpected appearances, and it certainly made its presence known to yield hungry and risk ignorant junk bond investors.

Starting in June 2014, junk bonds turned sour.

The Profit Radar Report doesn’t often touch on junk bonds, but the July 5, 2015 Profit Radar Report mentioned junk bonds’ role in a developing bear market:

The Greek drama is fueling a fair amount of crisis talk. We anticipate an equity correction soon and a full-blown bear market eventually (2016?), but that doesn’t mean other asset classes can’t turn down sooner.

Economic recessions are a diffuse process, not a sudden all-encompassing event. Investors with money in high yield funds should watch support levels and exercise appropriate risk management.

The SPDR Barclays High Yield Junk Bond ETF (JNK) is trading near support at 38.21. A break below support should be a warning for junk bond investors.”

JNK lost 20% since June 2014, and 13% since violating support at 38.21.

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It looks like junk bonds have entered a bear market already.

JNK may catch a bid around support at 33.30, but there are no bullish divergences. A move above the lower trend channel line is the minimum requirement to pause the selling for more than a week or two.

The junk bond decline has robbed investors (particularly retirees) of yet another income source.

Yes, economic recessions are a diffuse process, and junk bonds may be one of the first asset classes to drift into a new bear market.

Simon Maierhofer is the publisher of the Profit Radar ReportThe Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.


Junk Bond ETF Approaches ‘Make it or Break it’ Point

We’ve all heard the ‘canary in the mine’ analogy. Bond investors are said to be smarter than stock investors and thus considered the canary in the mine. If that’s true, the SPDR Barclays Junk Bond ETF is about to chirp.

It’s said that bond (NYSEArca: AGG) investors are smarter than stock investors.

Stocks are not quite sure how to react to the budgetary/debt ceiling standoff, so we definitely can use a fair amount of ‘smarts’ right about now.

High yield bonds (or junk bonds) are the closest relative stocks have in the bond family. This is due to their elevated yield and risk levels.

So what kind of clues does the performance of high yield bonds provide for stocks?

The SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) chart below shows some seemingly important support/resistance levels for JNK.

The green line has provided support since June. The descending red line has offered first resistance and now support. Both lines meet today at 39.70.

The situation for the iShares iBoxx $High Yield Corporate Bond ETF (NYSEArca: HYG) looks similar, although HYG has a bit more room before it hits support around 90.70.

The above chart also plots JNK against the S&P 500 (SNP: ^GSPC) to illustrate the correlation between junk bonds and stocks.

Quite frankly, based on this chart the correlation between stocks and junk bonds looks more like a myth.

JNK trades at the same level today as in November of last year. The S&P 500 (NYSEArca: SPY) on the other hand is up 25% since November 2012.

Now the question is if further weakness for junk bonds would spell trouble for stocks?

Not necessarily, purely based on the lack of direct correlation.

However, JNK is just above support, and a case could be made that the S&P 500 is about to break out of a bearish rising wedge.

What would that mean? The implications are discussed here: Will The S&P 500 be in Trouble if Support Fails?

Simon Maierhofer is the publisher of the Profit Radar Report.

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Yield Spread Between Junk Bonds and Treasury Bonds Hits Alarming Level

“If it seems too good to be true, it probably is” used to apply to investing. Although this piece of common sense folk wisdom has been eroding due to the Federal Reserve’s money policy, there’s reason to believe that junk bonds are in for at least a wake up call.

The Federal Reserve is watering (or drowning) growth investors and dehydrating income investors. The slim pickings interest rate environment is forcing investors into high yield/high risk vehicles, such as high yield or junk bonds.

High yield bond issuance saw a record high of $346 billion in 2012. In the first quarter of 2013, investors already gobbled up an additional $90.4 billion. Due to unprecedented demand, junk bond yields hit a record low 6.11% in January 2013.

Based on the BofA Merrill Lynch US High Yield Master II Option-adjusted Spread, junk bonds now yield only 4.79% more than US Treasury bonds.

Perhaps with a guilty conscience, the Fed has provided the liquidity needed to neutralize the usually associated with high yield (or more truthfully called junk) bonds.

Nevertheless, as the chart below illustrates, the spread below Treasury bond and junk bond yields is approaching a range that’s been troublesome for stocks.

The chart plots the S&P 500 against the inverted (to better illustrate the correlation) BofA Merrill Lynch US High Yield Master II Option-adjusted Spread.

The red dotted lines highlight the correlation between yield spread lows and market highs. The solid red line stands for yield resistance, the solid green line for yield support.

The current constellation means that risk for stocks is rising. In itself that doesn’t mean that we’ll be confronted with a major market top like 2007, but it increases the odds for a stock market pullback.

Since junk bonds perform similar to stocks, it may be appropriate to scale back or sell junk bond ETFs like the SPDR Barclays High Yield Bond ETF (JNK), or iShares iBoxx High Yield Corporate Bond ETF (HYG). JNK and HYG have both fallen below trend line support, emphasizing the bearish yield spread message.

Treasury ETFs, including the iShares Barclays 20+ year Treasury Bond ETF (TLT) should benefit from a decline in junk bond prices.

In fact, the Profit Radar Report issued a buy signal on long-term Treasuries on March 18, when TLT was still trading at 116.

Weekly ETF SPY: Junk Bond ETFs Breakdown – Canary in the Mine?

Who is the best canary in the mine? It is said that bond traders are smarter than stock traders. Considering that junk bonds are showing cracks, it might be interesting what the ‘canary’ has to ‘chirp.’

‘Are Junk Bonds Ready to Fall?” – USA Today
‘Junk Bonds Flash Warning Signal’ – MarketWatch
‘Junk Bond Decline: Should You be Afraid?’ – Barron’s
‘Junk Bond Risk Climbs in Europe as January Issues Reach Records’ – Bloomberg
‘High-Yield Selloff Just Beginning?”

When times are good, junk bonds (or junk bond ETFs) are called high yield bonds. When times are bad, they’re called by their real name, junk bonds.

Based on the above headlines, high yield bonds have fallen out of favor. At least that’s the media consensus. What does technical analysis show?

The chart for the SPDR Barclays High Yield Bond ETF (JNK) doesn’t look impressive. JNK just closed below trend line support. The recent all-time high was also accompanied by a bearish RSI divergence.

Although the technical picture looks similar, the JNK breakdown is not confirmed by its ‘junkie cousin’ – the iShares iBOXX High Yield Bond ETF (HYG). HYG remains above trend line support.

Does HYG matter more than JNK or vice versa? Probably not. JNK trades more actively (4.3 M shares compared to HYG’s 3.5 M), but is smaller ($12.8 B vs HYG’s $16 B).

Anyone short JNK may use the red trend line as stop-loss guide. The prudent approach is to wait for HYG to confirm JNK’s breakdown.

JNK and HYG have both decoupled from the stock market. Bond traders are often considered smarter than stock traders and viewed as canaries in the mine. If that is true, stocks and bonds may be about to hit a rough patch.

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