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Warning From The Yield Sector

I know many here invest in the yield side of the market in one form of another, so I thought I'd pass along my view of the very dangerous pattern that is unfolding in the high yield bond market, which is not only a good canary in the coal mine for all yield assets, HYG is also a good proxy for the stock market.

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The first chart shows HYG falling from the peak in clear 5 wave impulsive pattern into #1. It then did the partial retracement in a 3 step manner into #2. Then it fell in 5 waves again into i (of what I believe is part of a larger third wave to be labeled #3 once complete.) Now it has retraced some of those losses in 3 step manner in ii. That sets us up for a third wave of a larger third wave, which is the crash wave. That targets 60, near the 2009 lows for HYG. Update continues below chart...

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The next chart shows the very high correlation to the S&P500. Till recently they rallied together, with the last rally to new highs for the S&P500 landing while HYG was doing into topping thing, non-confirming the rally breakout for the S&P. That was a clear sign that this time was different, and thus no surprise the S&P500 soon slipped below its breakout level into the corrective mess we now see.

Worse, if HYG goes to a retest of the 09 lows - as the charts suggest - then the S&P500 would be expected to suffer a similar plunge.

I think the message is we have seen the peak of the central bank bubbles for this cycle, which sets us up for a major bear market, led by the yield sector, which saw a major portion of those central bank funds. Cash or short is the safety play this time around.

(click to enlarge)Click to enlarge

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Kevin

Disclosure: I am long PSQ.