Bearish Signals From Junk-Bond Fund?

Oct. 3.11 | About: ProShares Short (SJB)

By Bryan McCormick

The ProShares Short High Yield exchange-traded fund (NYSEARCA:SJB) hase seen a jump in the last several days that could be an important market signal.

The SJB tracks the inverse performance of junk bonds, which are particularly sensitive to economic stresses, and it rises when demand for safety is higher than demand for yield and risk. I have written several times in the last few months about using the inverse of junk-bond performance as an indicator of stress in markets.

On the hourly chart below, the upper panel shows that the risk side of the equation is approaching levels we last saw back in early August when markets slid precipitously. (The red line is the SJB; the green line is the S&P 500.) As the change in credit markets tends to lead that in stocks, we need to be mindful of the chance for further weakness in equities.

If investors and traders continue to shift away from risky assets on the credit side, it is likely that we will eventually see similar moves in stocks. Conversely, a drop in the SJB's performance could herald a rally.

SJB vs SPXClick to enlarge

(Chart data provided by Thomson Reuters)