Devkota: Research Points to Bearish Outlook
Right now, our research is pointing negative returns for the equity market. We believe that we are in the initial stage of this bear market and the high we saw in September 2018 will be the high for 2019 too. There are few things that make us bearish.
One of the indicators is the relationship between high-yield ETF vs. high-yield bond fund. There has not been any rally or decline in S&P 500 where high-yield instruments did not participate. Historically when both high-yield ETF and high-yield fund close above or below prior 3 months high or low that signals a start of the rally or decline.
We are seeing high-yield ETF make new 3 month high but high-yield funds are not participating in the rally with the same strength. This tells me that the currently rally is due to fear-of-missing-out rather than due to fundamental improvements. ETFs are more liquid so it brings plenty of short-term participants that will exit at the first sign of trouble.
As you can see in the charts below, in February 2019, we saw high-yield ETF make a new 3 month high but high-yield bond fund was unable to make a new high which tells me that this rally that we saw in 2019 may be coming to an end soon. There were 2 other instances when the bond-fund’s last signal was “sell” and the ETF gave us a “buy” signal and those signals turned out to be false.
On 3/2016 the ETF model gave us a buy signal and SPY was trading at $209, we got a buy signal from the bond fund on 7/2016 and SPY was at $217 so for those 4 months SPY went up 4% only. Here is where it gets more interesting the ETF model gave us a buy signal on 8/2018 when SPY was at $290 and we did not have a buy signal from the bond-fund. As of this writing SPY is at $275 but it went down as low as $234 which was a decline of -19%.