Junk Bonds Are Sending a Signal to Stock Investors

Something happened just before the historic 2007 stock market top -- and it's happening again

By Elliott Wave International

It's generally known that stocks are risky. It all hinges on how "hungry" investors are.

So, if investors' appetite for risk starts to diminish, it stands to reason that this is not a positive development for stocks.

But is there a way to gauge investors' risk tolerance so as to get an early warning sign before stocks start to tank?

Yes, keep your eye on the junk bond market.

You see, junk bonds also carry a great deal of risk because they're issued by companies with the weakest balance sheets. Investors' claim on assets in case of bankruptcy is usually next to the bottom rung, just one notch above equity holders. Hence, the trend in junk bonds often aligns with the trend in equities.

Here's the important point: When the trends of stocks and junk bonds diverge, with stocks holding up as the value of junk debt declines, it's usually a sign of impending trouble for stocks.

A past Elliott Wave Financial Forecast, a monthly publication which provides coverage of major U.S. financial markets, showed a historical example of such a divergence and said:

A countertrend rally high in prices for high-yield bonds occurred in February 2007, three months before the intraday extreme in the financials, five months before a top in the Dow Jones Composite Average and eight months before a top in the Dow Industrials. All stock indexes then crashed into the first quarter of 2009.

Now, here's what you need to know in these closing weeks of 2021: Another divergence has been shaping up between high-yield (or "junk") bonds and stocks.

Indeed, the Nov. 15 U.S. Short Term Update, an Elliott Wave International thrice weekly publication which offers near-term forecasts for key U.S. financial markets, explains why ...

... the tension created by the nearly two-month non-confirmation between HYG [a junk bond ETF] and the Dow is about to become more severe.

Plus, the message of the Elliott wave model regarding the stock market is also revealing.

If you're new to Elliott wave analysis, here's a quote from Frost & Prechter's Wall Street classic, Elliott Wave Principle: Key to Market Behavior:

In the 1930s, Ralph Nelson Elliott discovered that stock market prices trend and reverse in recognizable patterns. The patterns he discerned are repetitive in form but not necessarily in time or amplitude. Elliott isolated five such patterns, or "waves," that recur in market price data. He named, defined and illustrated these patterns and their variations. He then described how they link together to form larger versions of themselves, how they in turn link to form the same patterns of the next larger size, and so on, producing a structured progression. He called this phenomenon The Wave Principle.

Although it is the best forecasting tool in existence, the Wave Principle is not primarily a forecasting tool; it is a detailed description of how markets behave. Nevertheless, that description does impart an immense amount of knowledge about the market's position within the behavioral continuum and therefore about its probable ensuing path. The primary value of the Wave Principle is that it provides a context for market analysis.

If you'd like to learn more about the Wave Principle, there's a way to read the entire online version of the book for free.

That "way" is to become a Club EWI member. Club EWI is the world's largest Elliott wave educational community and membership is free. Plus, members enjoy free access to a wealth of Elliott wave resources on financial markets, investing and trading with zero obligations.

Just follow this link to get started: Elliott Wave Principle: Key to Market Behavior -- free and unlimited access.

This article was syndicated by Elliott Wave International and was originally published under the headline Junk Bonds Are Sending a Signal to Stock Investors. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

New Update on the Public's Voracious Appetite for Stocks

Here's a month-to-month breakdown of how much money individuals are spending on stocks

By Elliott Wave International

It's been noted before in these pages that ...

... Investors have put more money into stocks in the last 5 months than the previous 12 years combined

That was an April CNBC headline.

That remains an astounding fact to contemplate and a testimony to a widespread cavalier sentiment toward risk. The basic attitude is that stocks almost always go up.

Well, nearly a half year since that CNBC headline published, the public's interest in stocks has remained intense.

Here's an update from the November Elliott Wave Financial Forecast, a monthly publication which covers major U.S. financial markets:

When it comes to retail trading, investors are positively euphoric. JMP Securities estimates that 10 million new traders entered the stock market in the first ten months of the year, which is "on pace" with the prior record year in 2020. The chart of monthly net purchases of U.S. equities shows that buying fever is increasing. Last year was a record year for net buying, but it featured just 5 months in which net purchases surpassed $20 billion. According to VandaTrack, net buying has exceeded $20 billion in every month of 2021, with data through September.

Of course, the only reason why anyone buys a financial asset is that they believe the price will go up.

Indeed, this Oct. 21 financial headline is indicative of the pervasive bullish sentiment (Marketplace):

Will stock market indexes go up forever?

History suggests that the answer is an emphatic "no."

The current uptrend -- no matter how dogged -- will change sooner or later.

The best way to anticipate this change is by employing the Elliott wave model.

Returning to the November Elliott Wave Financial Forecast:

Staying highly attuned to the progressing wave structure has never been more important.

If you would like to delve into the details of how the Elliott wave model can help you forecast financial markets, you are encouraged to read Frost & Prechter's Wall Street classic, Elliott Wave Principle: Key to Market Behavior.

Here's an excerpt from the book:

[Ralph N.] Elliott recognized that not news, but something else forms the patterns evident in the market. Generally speaking, the important analytical question is not the news per se, but the importance the market places or appears to place on the news. In periods of increasing optimism, the market's apparent reaction to an item of news is often different from what it would have been if the market were in a downtrend. It is easy to label the progression of Elliott waves on a historical price chart, but it is impossible to pick out, say, the occurrences of war, the most dramatic of human activities, on the basis of recorded stock market action. The psychology of the market in relation to the news, then, is sometimes useful, especially when the market acts contrarily to what one would "normally" expect.

Our studies suggest not simply that news tends to lag the market but that it nevertheless follows exactly the same progression.

You can read the entire online version of Elliott Wave Principle: Key to Market Behavior -- 100% free!

All that's required for free access is a Club EWI membership.

Club EWI is the world's largest Elliott wave educational community and is free to join. More than that, members enjoy free access to a wealth of Elliott wave resources on investing and trading without any obligations.

Simply follow this link to get started right away: Elliott Wave Principle: Key to Market Behavior -- free and unlimited access.

This article was syndicated by Elliott Wave International and was originally published under the headline New Update on the Public's Voracious Appetite for Stocks. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

When Even Bears Act Bullishly (What It May Mean)

"Some indicators are making records"

By Elliott Wave International

It's difficult for most investors to take an independent stand from the crowd.

For example, it may be wise to "buy when there's blood in the streets," as Baron Rothschild famously said, but for many investors, that's easier said than done.

Likewise, when a financial uptrend has persisted, it's difficult for many investors to act in a contrary way to the pervasive optimism.

Consider this chart and commentary from the November Elliott Wave Financial Forecast, a monthly publication which provides coverage of major U.S. financial markets:

The chart shows the exposure to equities held by members of the National Association of Active Investment Managers. Readings above 100 mean that managers are leveraged long equities [and] this week's reading [is] 107.99%. ... Some indicators are making records. The bottom graph on the chart shows the equity exposure of the most bearish fund managers. Yes, even the bears are bullish. For the past three weeks, the most bearish fund managers were still net-long stocks by 50%, 65% and 50%. It's the first time in the history of the data ... that bearish fund managers have been net-long equities 50% or more for three consecutive weeks.

Here are three headlines which speak to the persistent bullish sentiment:

• Stocks Are Still the Place to Be, Our Exclusive Big Money Poll Finds (Barron's, Oct. 16)
• Invesco records fifth straight quarter of net inflows (Pensions & Investments, Oct. 26)
• Fund managers make their biggest bets on U.S. stocks in 8 years ... (Marketwatch, Nov. 16)

The takeaway is that when almost everyone acts bullishly, even the most bearish, there's relatively few investors left to buy to keep an uptrend going.

This doesn't mean that the financial uptrend will stop, say, tomorrow or the next day.

However, it does suggest that an investor will want to pay particularly close attention to the message of the Elliott wave model, which offers high-confidence insights into market turn junctures.

Indeed, here's a quote from Frost & Prechter's Wall Street classic, Elliott Wave Principle: Key to Market Behavior:

When after a while the apparent jumble gels into a clear picture, the probability that a turning point is at hand can suddenly and excitingly rise to nearly 100%. It is a thrilling experience to pinpoint a turn, and the Wave Principle is the only approach that can occasionally provide the opportunity to do so.

The ability to identify such junctures is remarkable enough, but the Wave Principle is the only method of analysis that also provides guidelines for forecasting. Many of these guidelines are specific and can occasionally yield stunningly precise results. If indeed markets are patterned, and if those patterns have a recognizable geometry, then regardless of the variations allowed, certain price and time relationships are likely to recur. In fact, experience shows that they do.

You can gain insights into the recurring price patterns of the stock market by reading the entire online version of the book -- 100% free!

All that's required for free access is a Club EWI membership. Club EWI is the world's largest Elliott wave educational community and is free to join.

Club EWI members are granted free access to a wealth of Elliott wave resources on financial markets, investing and trading.

Just follow this link to get started: Elliott Wave Principle: Key to Market Behavior -- free and unlimited access.

How to Outwit 99% of Investment Pros

Was COVID-19 a "bullish event"? No. Here's the real answer why stocks rose as the pandemic raged.

By Elliott Wave International

Waves of social mood fluctuate in accordance with the Wave Principle and determine prices in financial markets.

Moreover, these same waves regulate the tenor and character of social attitudes and actions.

The key point is that social mood is the cause. It is endogenous. Prices in financial markets and events in society are the effects. They are exogenous.

However, most people believe the opposite is true.

For example: Most people believe that recessions cause business people to be more cautious. However, Elliott Wave International posits that cautious business people cause recessions.

Or, consider the widespread notion that scandals make people outraged. In truth, outraged people seek out scandal. Consider that when mood is positive, fodder for scandal is often dismissed.

You can also flip around the notion that nuclear bomb testing makes people nervous and say that nervous people test nuclear bombs.

Here's another example: Many observers believe that a rising stock market makes investors increasingly optimistic. However, the evidence suggests that optimistic investors cause stock market prices to rise (and pessimistic investors cause market prices to fall).

Elliott Wave International's Asian-Pacific analyst, Mark Galasiewski, drove the point home further when he said this at the Chartered Market Technician Association's Asia-Pacific Summit in October:

If you were able to make that one counterintuitive leap that the same endogenous mass psychological swings that create patterns in the stock market also drive other headline social events, then you have already won half the battle in the market and you understand stock market movements better than 99% of industry professionals.

Social mood swings from extreme optimism to extreme pessimism and back again.

By the time that these social mood trends show up as major news or events (positive or negative), that's when the pendulum is set to start swinging in the other direction.

Recessions, scandals, nuclear testing and so on were mentioned as examples of what may occur during negative mood trends.

Let's add epidemics to that list. Yes, Elliott Wave International has observed a relationship between bear markets and infectious disease.

Using this knowledge, the April 3, 2020 Global Market Perspective, a monthly Elliott Wave International publication which covers 50+ worldwide financial markets, said:

Asian-Pacific and emerging market stocks began bull markets amid the SARS epidemic of 2003 and the Swine Flu epidemic of 2009. They should similarly embark on a bull market amid the Covid-19 pandemic of 2020.

Indeed, look at this MSCI Emerging Markets Index chart which Mark Galasiewski showed at that Asia-Pacific Summit previously mentioned:

As you can see, an uptrend did ensue amid Covid-19.

However, it would be wrong to say that epidemics are bullish for the stock market. That's that "exogenous" thinking trap which was discussed above. A proper way to think about it is that when social mood is at its lowest, epidemics are more likely. That's why they have so often marked a bottom, not a top. As Mark said:

Notice that these three major infectious diseases spread widely toward the end of major bear markets.

This is invaluable information for any investor. Imagine having this knowledge back in March 2020, when the first wave of the pandemic hit and everyone panicked!

If you would like to dig deeper into the "endogenous patterns" of the Wave Principle, you are encouraged to read the Wall Street classic, Elliott Wave Principle: Key to Market Behavior, by Frost & Prechter.

Here's a quote from the book:

The Wave Principle is governed by man's social nature, and since he has such a nature, its expression generates forms. As the forms are repetitive, they have predictive value.

Get insights into the "predictive value" of the Wave Principle by reading the online version of the book -- entirely free!

The only requirement for free access is a Club EWI membership. Club EWI is the world's largest Elliott wave educational community and is free to join. Members are under no obligations. Yet, members do enjoy complimentary access to a wealth of Elliott wave resources on financial markets, investing and trading.

Follow this link for free and unlimited access to the book: Elliott Wave Principle: Key to Market Behavior.

This article was syndicated by Elliott Wave International and was originally published under the headline How to Outwit 99% of Investment Pros. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

How Emerging Markets ETF Followed a Classic Elliott Wave Pattern

Here's what happened after the completion of a "bullish triangle"

By Elliott Wave International

A Charles Schwab survey shows that 15% of today's retail investors started investing in 2020.

And, regarding 2021, an August 2 CNBC headline said:

New investors are jumping into the market

So, when you combine the influx from this year and last, that adds up to a lot of new investors.

This is mentioned because some people who are new to investing may see the phrase "emerging markets" and get the impression that this is synonymous with only small countries.

Yet, "emerging markets" covers 75% of the world's population, and are comprised of nations like China, India, Russia, Brazil, South Korea, Thailand, Taiwan, Malaysia and more.

All told, emerging markets account for about a third of global GDP.

The point being -- new and veteran investors alike should at least have emerging markets on their radar screen for consideration. Yes, there's risk, yet there's also opportunity.

Consider a classic Elliott wave pattern in the Vanguard FTSE Emerging Markets ETF.

The April 2020 Global Market Perspective, a monthly Elliott Wave International publication which covers 50+ worldwide financial markets, said:

Largest emerging markets ETF completes bullish triangle.

Of course, the completion of that bullish triangle implied that the next price move would be up.

That's exactly what happened. Here's a current chart from Mark Galasiewski, an Elliott Wave International global analyst who focuses on the Asian-Pacific:

As you can see, the Vanguard FTSE Emerging Markets ETF zoomed northward right after Mark's bullish analysis in April 2020. Since then, the value of this exchange-traded fund has increased by approximately 55%.

Keep in mind that the Global Market Perspective is filled with charts and analysis based on the Elliott wave model.

The Elliott wave model works for any widely traded financial market in the world because the patterns of investor psychology are the same in, say, Japan as they are in Germany, France, India or any another nation.

Read this quote from Frost & Prechter's Elliott Wave Principle: Key to Market Behavior:

In its broadest sense, the Wave Principle suggests the idea that the same law that shapes living creatures and galaxies is inherent in the spirit and activities of men en masse. Because the stock market is the most meticulously tabulated reflector of mass psychology in the world, its data produce an excellent recording of man's social psychological states and trends. This record of the fluctuating self-evaluation of social man's own productive enterprise makes manifest specific patterns of progress and regress. What the Wave Principle says is that mankind's progress (of which the stock market is a popularly determined valuation) does not occur in a straight line, does not occur randomly, and does not occur cyclically. Rather, progress takes place in a "three steps forward, two steps back" fashion, a form that nature prefers. More grandly, as the activity of social man is linked to the Fibonacci sequence and the spiral pattern of progression, it is apparently no exception to the general law of ordered growth in the universe. In our opinion, the parallels between the Wave Principle and other natural phenomena are too great to be dismissed as just so much nonsense. On the balance of probabilities, we have come to the conclusion that there is a principle, everywhere present, giving shape to social affairs, and that Einstein knew what he was talking about when he said, "God does not play dice with the universe." The stock market is no exception, as mass behavior is undeniably linked to a law that can be studied and defined. The briefest way to express this principle is a simple mathematical statement: the 1.618 ratio.

Get the details of how the Fibonacci sequence of numbers provides the mathematical basis for the Wave Principle by reading the online version of Elliott Wave Principle: Key to Market Behavior for free.

All that's required for free access to this Wall Street classic is a Club EWI membership. Club EWI is the world's largest Elliott wave educational community and is free to join. Members enjoy free access to a wealth of Elliott wave resources on investing and trading without any obligations.

Just follow this link to get started: Elliott Wave Principle: Key to Market Behavior -- free and unlimited access.

This article was syndicated by Elliott Wave International and was originally published under the headline How Emerging Markets ETF Followed a Classic Elliott Wave Pattern. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Bitcoin's All-Time High Foretold Before U.S. ETF Launch

"A developing upward wave is in progress"

By Elliott Wave International

On Oct. 20, Bitcoin climbed to a new all-time high above $66,000 -- quite a rebound from its price level just below $30,000 as recently as July.

At that time, the sentiment was quite bearish. Here are just a couple of sample headlines:

• Bitcoin: [Investment Firm Chairman] Says Price Can Crash to $10,000 (Bloomberg, July 9)
• Why You Should Worry About the Next Crypto Crash ... (Money, July 20)

All the while, Elliott Wave International's head crypto analyst Tony Carrion was saying, in effect, "hold your horses. Bitcoin's run is far from over."

In the "Cryptocurrency" section of the July Global Market Perspective (a monthly Elliott Wave International publication which covers 50+ worldwide financial markets), when the grandaddy of digital currencies was still in freefall, Tony told subscribers:

Bitcoin [is] at or near the end of its [Elliott wave] correction.

Short, sweet and to the point.

Well before July was over, Bitcoin found a bottom and has been in "bounce back" mode ever since.

The message of the Elliott wave model was the basis for Tony's prescient Bitcoin call.

In the September Global Market Perspective, Tony again got right to the point in his Bitcoin analysis:

A developing [upward wave] is in progress.

And, as all Bitcoin observers know, that upward Elliott wave has persisted well into October.

Yet, on Oct. 20, the headline of a major financial website stated (CNBC):

Bitcoin jumps to new high above $66,000 after landmark U.S. ETF launch

But as just described, Bitcoin's new all-time high was in the cards, according to the Elliott wave model, months ago.

As of this writing on Oct. 25, Bitcoin is trading a little below that all-time high.

What's next?

Get insights by reviewing the charts with Bitcoin's Elliott wave count, which are found in the "Cryptocurrency" section of the Global Market Perspective.

The Elliott wave model is ideally suited for emotional markets like cryptocurrencies and it can help you to anticipate Bitcoin's next big trend shift.

If you'd like to learn about the Elliott wave model, or need to brush up on your knowledge, you are encouraged to read Frost & Prechter's Wall Street classic, Elliott Wave Principle: Key to Market Behavior. Here's an excerpt from the book:

Most important, the Wave Principle often indicates in advance the relative magnitude of the next period of market progress or regress. Living in harmony with those trends can make the difference between success and failure in financial affairs.

If you'd like more insights into the Wave Principle, realize that Club EWI members are granted free access to the entire online version of the book.

In case you don't know, Club EWI is the world's largest Elliott wave educational community and is free to join. Members are under no obligations and enjoy free access to a wealth of Elliott wave resources on investing and trading, as well as Elliott Wave Principle: Key to Market Behavior.

Follow the link to become a Club EWI member and get your free access to Elliott Wave Principle: Key to Market Behavior.

This article was syndicated by Elliott Wave International and was originally published under the headline Bitcoin's All-Time High Foretold Before U.S. ETF Launch. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.