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Weekly eLetter 8/5/2022 — The Times They Are a-Changin’

Those of you who follow our Friday missives know that we often look to the performance of ‘Junk’ bonds (high yield bonds if you prefer) for clues on the health of the US stocks. A healthy junk bond market typically means that there’s enough liquidity in the markets for stocks to ALSO perform well. A quick aside: in apparent contrast to the derisive name ‘Junk’ bonds are somewhat unfairly pigeonholed. In the larger scheme of things, these bonds are anything but junk.

Bond rating agencies rank this class of bond as being below ‘investment grade’ because the risk factor is generally higher than other types of bonds. However, these corporate bonds are, over time, less risky than the broad stock market indexes. Here’s why (source: SeekingAlpha):

In a company’s capital structure, bondholders are senior claimants to shareholders. In the event of bankruptcy and liquidation, bondholders will receive the recovery value of the firm’s assets first. Shareholders are the owners of the firm, and benefit directly from the capital appreciation in the value of the firm. Bondholders are backed by the company’s obligation to pay contracted interest on the amount of principal that they have lent and to receive that principal amount at maturity.

I mentioned a week or two ago that I was feeling encouraged by the happy mood in the junk markets. And their performance has continued and strengthened. Have a look at their chart:

Although the chart has been pretty ugly this year, we saw a ray of hope about July 20. On this day, the JNK markets appear to have stopped going down — for one day. And then, on the next day the JNK market started going UP — a sight for sore eyes! Remember that on these GONOGO charts, a light blue is an UP-trending market. And a few days later the daily bars turned dark blue: indicating a strongly up trending market. We have been pleased. Furthermore, this upward trend appears to be moving into stocks as well!  Have a quick look at this chart of SPY, an ETF representation of the US stock market here:

You’ll note that about the same time, the S&P Index* chart looked similar to that of the JNK chart. SPY didn’t start out quite as strong, but it DID move toward an uptrend. The trend faltered a bit — with the brown bar showing an indecisive market. But then the uptrend continued, and for the past six days we see blue bars (and blue skies!)  The trend is strongly UP.  As always, technical charts don’t tell us how LONG a trend will last, or how far Up it will go, but for now we’re comfortable that our stepping into equities is the right place to be for now. We know that Ms. Market can (and often does) change her mind at any time, and there certainly are plenty of areas of concern that could affect our markets, but our fingers are crossed that this trend will continue.

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