Does the Corporate Junk Bond Market Predict a US Stock Market Crash?

junk bond yields about to skyrocket

Does the corporate junk bond market predict a US stock market crash? Since the massive sell-off in the US stock market yesterday makes some of the information in this article slightly outdated, I was going to just put it in the rubbish bin even though I wrote it well before US market open in NY yesterday but delayed publishing it until today. The reason I was, at first, not going to publish it was for the obvious reasons that it looks like I wrote it after the fact, even though this was not the case.  My timing in deciding to hold off publication, as I often write two or three articles ahead of time and schedule them for later publication on my blog, was simply bad timing as the event predicted in this article by behavior in the US corporate junk bond market manifested yesterday in a mini US stock market crash.

However, given that just this past week, two of my three articles predicted events before they happened, I decided to publish this article “after the fact” for the simple reason that there is still very relevant and useful information contained in that article in understanding the future that the corporate junk bond market predicts about US stock markets . Number one, I predicted a sell-off in gold to $1,480 and of silver to below $16.80 an ounce on 9 August Asia time (8 August US time), both of which manifested on 13 August to nearly my exact target prices, when gold sold down to $1,479 and silver to $16.41 an ounce. Secondly, after this happened, I published a follow-up article to my first prediction coming true, titled “What’s Next?”, which I published at 12:30PM Hong Kong time yesterday (11:30PM New York time, 13 August), which can be confirmed by the time stamp on my blog of this posted article.

In that article, I wrote that it was too early to concede that the big sell-offs in gold and silver that happened in New York on Monday would lead to a larger immediate sell-off in gold and silver. In that article, I hinted that gold and silver could rebound yesterday in the New York gold market that was 9-hours away from opening because, I actually have observed some promising developments beneath the surface, and though it’s too early to discuss them, I must admit that there is a reason to not yet concede, despite yesterday’s gold and silver price smash, ‘Here we go again’.” One of those reasons, but not the only one, was an impending sell-off in the US stock market that I believes was going to happen, as gold prices and US stock market behavior have been moving in opposite directions as of late. Subsequently, one actually happened yesterday. I provided another reason that gold and silver may rebound from its Monday selloff, through the short 3-5 videos I deliver to my patrons every week, which was another inverse relationship of gold and silver prices to another asset price, that was dropping in price in Asia before market open in New York. Because that asset price was dropping, I told my patrons that gold and silver prices could reverse as there was an inverse relationship that I uncovered between these two asset prices that has been manifesting for several months now. As this is a unique inverse price relationship that I have not heard a single other analyst mention, I will leave that asset price relationship as a hidden gem only for my patrons for now.

Finally, here is the rest of the article that I wrote yesterday about the future US stock market crash predicted by imminent corporate junk bond market yields.

We are now at an inflection point for the US stock market. As you can see, per the graph I’ve drawn two possible outcomes, an Option A of a breakout higher from the flag now forming on the chart, or an Option B of a breakdown and a US stock market crash from the flag.

us stock market coming crash

I believe that Option B is the more likely outcome and here’s why.  When we really want to know what lies ahead for the US stock markets, as my past clients know, I have very frequently discussed the optics of the corporate junk bond market and the implications for the price behavior of US corporate junk bonds on the US stock market. I have often used the behavior of the US corporate junk bond market as a lead indicator to predict what is going to happen in the US stock market. And right now, the situation is precarious in the corporate junk bond market.

Above, I have posted the 5-year ICE BofAML US High Yield Master II Effective Yield chart and you can see that it has formed a very conspicuous bullish cup and handle formation. Of course, given the inverse relationship between bonds and prices, higher yields means that prices are falling. Higher yields also mean that risk is increasing and that the market is no longer willing to discount the greater risk associated with junk bonds.

I have circled two conspicuous inflection points in the above cup and handle formation. The first, numbered 1, is when the cup formation started turning higher. This happened on precisely 1 October 2018. The result? The US S&P500 sold down by 20% from that point onward. The second inflection point I circled, which is on the verge of manifesting, but has not yet manifested is numbered 2. This is the point at which the cup and handle formation breaks out of the handle consolidation phase. This has not yet happened, but is on the verge of happening and I believe that it is an inevitable event at some point over the next few months. And when this happens, I believe that we will experience an even larger sell off in US stock markets than manifested after inflection point number 1. Please note that you may read all of our articles when first published at its original publication site here and that you may sign up for our free wealth education and investment newsletter here.

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J. Kim

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