Market Lab Report - Premarket Pulse 12/28/15
Major averages on Wednesday continued their bounce on mixed, below average, holiday volume. Thursday's market finished roughly flat, closing early at 1 p.m. EST. The NASDAQ Composite sits just above resistance at the 50-day moving average while the S&P 500 closed a hair under resistance below the confluence of its 50-day and 200-day moving averages.
The last trading week of the year can sport larger than expected moves such as during the last week of 2012. This may be due in part to lower trading volumes which can exaggerate volatility, or institutional portfolio managers making final adjustments to their portfolios. So there is never a time for complacency. If you hold any positions, keep your stops tight as per usual going into the New Year.
On the issue of junk (high yield) bonds, when junk bonds fall sharply as they have done a number of times since 2009, the stock market also falls sharply. So while various articles on this matter put correlation at typically between 30-40% between junk bonds (ETF: HYG) and the S&P 500, this correlation jumps when junk bonds correct sharply. Likewise, when these bonds rally, the market often stages a rally of sorts as well. As one can see, since junk bonds have been in a downtrend since mid-2014, the S&P 500 has been unable to stage any meaningful rally.
That said, there is a growing concern that junk bonds are replaying their 2007-2008 performance as spreads between junk bonds and higher quality bonds have spiked as they did in 1990, 2000, and 2007. This can contribute to shorter term profit opportunities as volatility may increase just as it did in 2007-2008. This may bode well for the VIX Volatility Model as it not only capitalizes on uptrends which are low volatility events, but its real strength lies in more volatile markets. Stay tuned.
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