Here’s a Thought for You on High Yield Debt and What I Think It’s Not Telling Us to Do Yet

So, I look at lots of risk signals, and I love watching $JNK. Toward the top of the market, I was warning of caution partly because of how high yield debt was performing relative to equities (e.g., here, here). And that turned out to be prudent as we sort of fell apart. But as we continued to fall, and as we’ve entered this range, I’m not entirely concerned now because of many things I’ve discussed before (e,g, here, here). And that is despite junk bonds continuing to look like total trash here.

So here’s the thinking on this:

  • I have a lot of signals that look ok
  • Junk bonds look completely awful

What am I to do? Am I to assume that junk bonds are telling the truth and that everything else is misleading us? Or am I to conclude that the majority of evidence points to not such a bad risk off environment (no crash, no bear market—at least not yet)? And if the latter, then how do I explain junk bonds?

And so here is how I am going to try to explain that. You see, as a refresher—and to save you a ticker lookup—$JNK does look like total shit here:

JNK

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A Few Additional Notes on $ES

Despite us continuing to be rangebound, and thus a little unclear on the next direction, I do favor the bear count still on $ES. There are a few reasons.

First, let’s look at how this could be counted internally.

  1. One thing to note is that in contrast to the last bear counts, I have upgraded the wave degree from minuette (orange) to minute (blue). The reason for that is that if this is the beginning of a move down, the structure has become quite large for minuette degree.
  2. What this could mean, since I believe we need to go very low to complete minor (green) C, is that minute (blue) 3 could be a monster, extending perhaps all the way to the 3.618 extension, before flagging in the 4th wave before then giving us an equally deep 5 (or a 5 that is even longer than 3)—the extension in an impulse can happen in any of the 3 motive waves.
  3. I have noted the invalidation level for this count. Above this, and perhaps this crap we’ve been in has been a B wave.
  4. This count looks great because (on my labelling here) minute (blue) 1 is a clear 5 waves, but minuette (orange) b is not. And anyone who wants to count this as a correction has to ignore that and pretend like they don’t see that. That little b is a clear 3-wave structure, and a correction here shouldn’t end on one of those.
  5. That said, the invalidation level is ridiculously close to us and I won’t be surprised to see it breached because we’re so close to it now and the market tonight just keeps melting up right now. But, it’s not over ’til the fat lady sings.

ES

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I Am Going to Adopt a More Bearish Tone: Here’s Why

Recap:

  1. I had adopted a bullish stance, which was prudent, as we eventually rallied quite powerfully. The count I have been using counts a significant low in place, and this rally as needing a retracement.
  2. I have acknowledged the presence of a more bearish alternative (here) out of an abundance of caution.
  3. However, taking a wide view of the risk signals I look at leads me to want to increase my risk aversion here. I will detail some of those below.

I’ve already complained about this a few times, but Bitcoin is not rallying powerfully as I had expected. To the contrary, it’s been rather weak. I’m not going to ignore that. Here is how I am going to count it until it proves itself with an enduring rally. It’s a long and complex correction, ridiculous actually (mirroring this long and complicated period we’ve been in with equities). But, it could very well need another leg lower.

BTC

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$JNK Vs. $SPX Is Telling Me to Be Unconcerned

I want to briefly look at $JNK vs. $SPX. In early November, junk bonds’ divergence from the S&P was sending warnings, and it led to that nasty corrective period in equities. The “jaws” were quite apparent leading to the correction. As the S&P 500 rallied, junk bonds were being sold off. And then the S&P followed.

JNK

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Couple of Additional Data Points

I’ve been sprinkling my posts today with things I believe are telling us we are bullish here (such as oil, a reference to bitcoin, a reference to Apple’s structure—here, and here). Here’s a couple more.

First, I noted previously that the $DAX suggested markets would go lower (first here, then referred to again here). Now, it’s not moved down impulsively. And so, let’s refine the count. I think we will have to do something like this for it. I think we got a huge impulse down for minor (green) A, then a triangle green B (instead of the great big B here), followed by a tiny green C.

I think it’s now primed for a 1-2-1-2 pump. Or, “The $DAX says Übergehen.” The other count was too obvious and so everyone’s trying to play it and everyone’s going to get blown up.

DAX

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I Am Inclined to Count $ES Bullishly Here

It was prudent to be bearish during the sideways chop we had been in because it culminated in the selloff we just had. That said, it’s important to adapt and reassess.

The very bearish counts need us to move much lower and much faster. In other words, if this were a one down two up, we should be in a third wave down and I feel like we would all know it. Looking at it as it stands, there is a way to count the advance as an impulse wave (the orange 4 of the blue 1 is a bit big compared to the 2, but not too terribly so), and looking at the proportions of the selloff, it has the “look” of a 3-wave move. And: it came right to the 50-61.8% retracement of the prior advance, so all of this—barring another selloff—is an excellent setup for a 1-2 pump.

Couple this with some of the bullish signals I saw at the low today, the fact that the Nasdaq 100 can be counted as a correction, and there’s a good chance we may move up sharply from here.

Things I would like to see in the coming days: a vast improvement in breadth, at least one high volume green daily bar, and Bitcoin finding its legs.

ES

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What I’m Seeing Here

Sorry to keep being the party pooper, but I’m still seeing lots of risk off warnings here. I know, I know, it gets tiresome, but, these are the kinds of signals that saved me in early 2020. My big mistake was not listening to these signals when they all reversed in the summer after the COVID crash, so I must listen to them here. I was in denial then given the lockdowns.

I will just run through them as a list here:

1. $BTC continues to slide. While, yesterday, everyone was celebrating its reaching a prior area of support (orange line) and calling the lows “in,” today it broke again and now  threatens to lose that support.

BTC

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