The best way to play junk bonds

May 19, 20153 Comments

TLT LONG

High yield bonds, affectionately called “Junk bonds” by the industry, have been defying the recent pullback on investment grade paper lately. Take a look at the chart of the US long treasury “TLT” above. That looks like a topping formation to me. Lower high, lower low taking out the last low, and a break in the 200 day (40 week) MA. Ugly!

 

Now take a look at the US SPDR High yield ETF “JNK”. While the junk bond market is obviously finding some resistance at a prior area of challenge ($40-ish on JNK)—the technical signs are vastly more encouraging than those for TLT. Moneyflow momentum (top pane) is up, as is cumulative moneyflow (bottom pane)—which has a lovely trend. Comparative strength vs. TLT (third panel from bottom) is hooking up. And of course, all of the momentum oscillators are pointing up.

jnk

JNK may stay in limbo for a while as it tries to break the $40 ceiling. But sentimentrader.com has been showing sentiment statistics that suggest – believe it or not –  that JNK is oversold from an investor sentiment perspective. In other words, if traders start to look at what I’m seeing on this chart, we may see JNK break its ceiling.

 

You and I know that we shouldn’t buy until that $40 ceiling is broken definitively. But if it does, the junk bond index may be a great place to see some upside.

3 Comments

  • Hi Keith,

    I know you have recommended XEB.TO in the past. Would JNK and XEB.TO be much different? Would these be affected by rising interest rates?

    Eric

    Reply
    • XEB doesn’t display the same pattern as JNK–I haven’t looked into the internals to determine why (its currency hedging should neutralize that aspect of the trade for the TSX listing it holds)- but I can say that it isn’t as technically strong as JNK at this time.

      Reply

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