Stocks and Junk Bonds: "This Divergence Appears Meaningful"
"Everything was aligned until February 2"

By Elliott Wave International

The trends of the junk bond and stock markets tend to be correlated.

The reason why is that junk bonds and stocks are closely affiliated in the pecking order of creditors in case of default. The rank of junk bonds is only slightly higher than equities because debt involves a contract.

Given these two markets are usually correlated, it's worth paying attention when a divergence takes place. Indeed, a divergence is in the works now. In other words, while stocks have been holding up, the price of junk bonds have been trending lower for much of the year.

Here's a headline from a few months ago (Reuters, March 16):

Investors shun high-yield bonds on recession, banking risks

At the same time, as mentioned, the S&P 500 and especially the NASDAQ has remained elevated.

The June 16 U.S. Short Term Update, which is a thrice weekly Elliott Wave International publication, discussed this divergence via this chart and commentary:

The graph shows that junk bonds diverged relative to stocks at the January 2022 peak, when stocks started their bear market. Both trends then came into alignment during the decline as well as the countertrend rallies that were interspersed in the selloff. Everything was aligned until February 2, which is when the yield on junk bonds made a low (shown as a high on the inverted chart). Yields then started to rise but instead of stocks declining, which would keep both trends side by side, equities continued to rally. This divergence appears meaningful.

The U.S. Short Term Update goes on to say that this divergence is not meant to be used for near-term market timing. But it is an indicator to keep in mind along with other indicators as well as the Elliott wave model.

If you're unfamiliar with Elliott wave analysis or need to re-acquaint yourself, you are encouraged to delve into the definitive text on the subject, Elliott Wave Principle: Key to Market Behavior, by Frost & Prechter.

Here's a quote from the book:

After you have acquired an Elliott "touch," it will be forever with you, just as a child who learns to ride a bicycle never forgets. Thereafter, catching a turn becomes a fairly common experience and not really too difficult. Furthermore, by giving you a feeling of confidence as to where you are in the progress of the market, a knowledge of Elliott can prepare you psychologically for the fluctuating nature of price movement and free you from sharing the widely practiced analytical error of forever projecting today's trends linearly into the future. 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.

Here's the good news: You can read the entire online version of the book for free once you become a Club EWI member.

Club EWI is the world's largest Elliott wave educational community and is free to join. Moreover, members enjoy free access to a wealth of Elliott wave resources on investing and trading.

Get started by following this link: Elliott Wave Principle: Key to Market Behavior -- get free and unlimited access now.

This article was syndicated by Elliott Wave International and was originally published under the headline Stocks and Junk Bonds: "This Divergence Appears Meaningful". 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 Germany's Economy is Turning Ugly

This economic gauge "dipped back below zero in less than a year"

By Elliott Wave International

In November 2020, when fears were rampant over a second wave of the coronavirus pandemic, the president of the European Central Bank called for economic stimulus (Reuters):

Facing gloomy outlook, Lagarde calls for unlocking EU aid

In December of 2020, what is known as the Next Generation EU package became operational. This economic aid was massive, amounting to more than €2 trillion at current prices.

But you wouldn't know it by looking at what's going on in Germany. It took just 24 months for the European Union's largest economy to resume its decline.

Here's an overview from the June 2023 Global Market Perspective, a monthly Elliott Wave International publication which covers an array of financial markets:

German manufacturing orders (top left) dipped back below zero in less than a year. Industrial orders (bottom left), which had already rebounded before stimulus was enacted, returned to their old growth rate within 18 months.

Meanwhile, producer prices (middle column) fell to 4% yearly growth in April -- down from 46% in August 2022 -- while wholesale prices, which tend to lead the consumer-prices indexes, have dipped below zero for the first time since December 2021. ... The two ZEW surveys shown in the right column reflect sentiment among institutional investors. Their views about the economy's current situation (top) and its future growth prospects (bottom) are declining from multi-year highs.

As Bloomberg reported on May 25:

Europe's Economic Engine Is Breaking Down
Germany is at risk of a long, slow decline -- with consequences for the whole of the EU

But what about other major economies in the European Union, as well as Britain?

Indeed, what does the economic picture look like in the world's two biggest economies, the U.S. and China?

Our Global Market Perspective covers 50-plus financial markets as well as the world's major economies.

Elliott Wave International's main way to analyze these 50 financial markets is to employ the Elliott wave model.

If you'd like to get insights into Elliott wave analysis, read Frost & Prechter's Wall Street classic, Elliott Wave Principle: Key to Market Behavior. 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.

Sometimes the market appears to reflect outside conditions and events, but at other times it is entirely detached from what most people assume are causal conditions. The reason is that the market has a law of its own. It is not propelled by the external causality to which one becomes accustomed in the everyday experiences of life. The path of prices is not a product of news. Nor is the market the cyclically rhythmic machine that some declare it to be. Its movement reflects a repetition of forms that is independent both of presumed causal events and of periodicity.

The market's progression unfolds in waves. Waves are patterns of directional movement.

If you'd like to read the entire online version of the book for free, you may do so once you become a member of Club EWI, the world's largest Elliott wave educational community.

A Club EWI membership is also free and allows for complimentary access to a wealth of Elliott wave resources on investing and trading.

Join Club EWI now by following this link: Elliott Wave Principle: Key to Market Behavior.

This article was syndicated by Elliott Wave International and was originally published under the headline How Germany's Economy is Turning Ugly. 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.

Stocks: Possible Replay of an Ominous Price Pattern

"I became panicky and covered at a considerable loss..."

By Elliott Wave International

The reason price patterns tend to repeat in the stock market is that investor psychology never changes.

The Elliott wave model directly reflects these largely predictable swings in investor psychology. That's what the Elliott wave principle is all about.

One of those price moves which has historically fooled investors is the first big rally in a bear market.

These rallies are characterized by an "aggressive euphoria," as Frost & Prechter's Wall Street classic book, Elliott Wave Principle: Key to Market Behavior, states.

Why? Because many investors are convinced that the bull market is back.

In Robert Rhea's 1934 book, The Story of the Averages, he described what was going on regarding the rally in the early months of 1930:

I became panicky and covered [my short position] at a considerable loss. ... Nearly everyone was proclaiming a new bull market. Services were extremely bullish.

As you know, the 1929-1932 bear market turned out to be brutal.

A more recent example is what took place during the 2007-2009 bear market. This chart is from a past Elliott Wave Theorist, a monthly publication which covers major financial and cultural trends:

The black arrow indicates the October 2007 top. After the initial leg down, notice that sizeable rally around March 2008. A lot of investors plowed a lot of money into the market at precisely the wrong time. As you can see, the worst of the 2007-2009 bear market was ahead.

These two historic examples of bear market rallies do not mean that we're on the verge of an exact replica.

But we do see striking similarities between those periods of price history and how the market is behaving here in 2023.

Those similarities include the stock market's Elliott wave pattern. Frost & Prechter's Elliott Wave Principle: Key to Market Behavior was referenced earlier. Here's another quote from this definitive text on the Wave Principle:

Without Elliott, there appear to be an infinite number of possibilities for market action. What the Wave Principle provides is a means of first limiting the possibilities and then ordering the relative probabilities of possible future market paths. Elliott's highly specific rules reduce the number of valid alternatives to a minimum. Among those, the best interpretation, sometimes called the "preferred count," is the one that satisfies the largest number of guidelines. Other interpretations are ordered accordingly.

If you'd like to read the entire online version of the book, you may do so for free once you become a member of Club EWI, the world's largest Elliott wave educational community.

A Club EWI membership is also free and allows for free access to a wealth of Elliott wave resources on investing and trading.

Join Club EWI now by following this link: Elliott Wave Principle: Key to Market Behavior.

This article was syndicated by Elliott Wave International and was originally published under the headline Stocks: Possible Replay of an Ominous Price 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.

Will These 2 Sectors Lead the Stock Market Lower?

This key sector continues to be "fragile"

By Elliott Wave International

Although it doesn't feel like it sometimes, the U.S. stock market has been in a downtrend since January 2022.

The reason it doesn't feel like it is because the S&P 500 has been in a narrow trading range between about 3700 and 4300 for more than six months -- going back to at least November.

Some observers believe a narrow trading range will persist (Reuters, May 24):

Stocks set for range trading as central banks near end game: Reuters poll

Unsurprisingly, some believe that if stocks break out of this trading range, it will be to the upside.

The strong rally on June 2 -- when the Dow Industrials surged more than 700 points -- certainly lends credence to that bullish opinion.

Of course, there's the possibility that more upside is ahead.

However, in addition to using Elliott wave analysis, Elliott Wave International regularly reviews dozens of market indicators and we see a lot of red flags for the market.

If, indeed, the bear market is not over, which sectors will lead the way lower?

Well, one of the prime candidates is the banking sector.

Back on March 17, the Elliott Wave Theorist, a monthly publication which covers major financial and cultural trends, showed this chart (wave labels included for subscribers) and said:

It is well to keep in mind how fragile the banking system is. ... [The chart] shows that the banking sector is emerging as a downside leader.

As I write on June 5, there's nothing about the index's price action which would alter our March analysis.

Another sector to keep in mind is technology.

As the June Elliott Wave Financial Forecast, a publication which covers major U.S. financial markets, noted:

The NASDAQ's recent outperformance is dramatic relative to the market's most senior stock index, the Dow Jones Industrial Average.

Of course, the NASDAQ is dominated by big tech names. If they finally reverse, keep in mind that sectors which lead on the upside often turn around and lead on the downside.

A key way to keep on top of the NASDAQ (as well as other stock indexes) is to employ the Elliott wave model.

If you're unfamiliar with Elliott wave analysis, read Frost & Prechter's Elliott Wave Principle: Key to Market Behavior. Here's a quote from the book:

All waves may be categorized by relative size, or degree. The degree of a wave is determined by its size and position relative to component, adjacent and encompassing waves. [R.N.] Elliott named nine degrees of waves, from the smallest discernible on an hourly chart to the largest wave he could assume existed from the data then available. He chose the following terms for these degrees, from largest to smallest: Grand Supercycle, Supercycle, Cycle, Primary, Intermediate, Minor, Minute, Minuette, Subminuette. Cycle waves subdivide into Primary waves that subdivide into Intermediate waves that in turn subdivide into Minor waves, and so on. The specific terminology is not critical to the identification of degrees, although out of habit, today's practitioners have become comfortable with Elliott's nomenclature.

Get free access to the entire online version of this Wall Street classic by signing up for a free Club EWI membership.

In case you don't know, Club EWI is the world's largest Elliott wave educational community and members enjoy complimentary access to a wealth of Elliott wave resources on investing and trading.

Get started by following this link: Elliott Wave Principle: Key to Market Behavior -- get free access.

This article was syndicated by Elliott Wave International and was originally published under the headline Will These 2 Sectors Lead the Stock Market Lower?. 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.

Why a U.S. Recession May Foil Economists' Expectations

"Many classic indicators of a recession are exactly where they were at the..."

By Elliott Wave International

You may have heard that Germany has slipped into a recession.

What you may not have heard is, the German government anticipated an economic uptick in Q1, not a slide.

Reality failing to meet expectations may extend beyond the German economy. A similar scenario could play out in the U.S.

Here's what I mean: The Federal Reserve Bank of Philadelphia's Second Quarter survey revealed that the average expectation of 38 "professional forecasters" is for real GDP growth of 1.3% in 2023.

Perhaps these professionals have not taken a hard look at some key leading economic indicators, or if they have, they interpret them differently than Elliott Wave International.

Specifically, the just-published June Elliott Wave Financial Forecast, which covers major U.S. financial markets and the economy, showed this chart and said:

Many classic indicators of a recession are exactly where they were at the beginning of past recessions. In fact, the year-over-year change in the Conference Board's Leading Indicators Index, which includes 10 different measures, is at -8% ... similar readings came near the outset, or in, each of the last four recessions. In April, just three out of ten indicators were positive. ... A 4% decline in the LEI index signals a recession, according to the Conference Board, so the majority of economists are clearly bucking history.

Now, one of the three of ten indicators that are positive is the S&P 500.

What are the expectations for this index?

Here's a May 8 headline from Marketwatch:

S&P 500 could rise as high as 4,400 in coming months, says Wall Street strategist who called 2023's rebound

Yes, big technology names helped to carry the S&P 500 higher. And this strategist might turn out to be right about the future performance of the index.

However, it might be a good idea to check out what the Elliott waves are saying about the stock market. After all, the performance of the economy tends to follow the performance of the stock market.

If you'd like to learn how to analyze the stock market using Elliott waves, read Frost & Prechter's Elliott Wave Principle: Key to Market Behavior. Here's a quote from this Wall Street classic:

The "right look" of a wave is dictated by all the considerations we have outlined so far in the first two chapters. In our experience, we have found it extremely dangerous to allow our emotional involvement with the market to let us accept a wave count that reflects disproportionate wave relationships or a misshapen pattern merely on the basis that the Wave Principle's patterns are somewhat elastic.

[R.N.] Elliott cautioned that "the right look" may not be evident at all degrees of trend simultaneously. The solution is to focus on the degrees that are clearest. If the hourly chart is confusing, step back and look at the daily or weekly chart. Conversely, if the weekly chart offers too many possibilities, concentrate on the shorter term movements until the bigger picture clarifies. Generally speaking, you need short term charts to analyze subdivisions in fast moving markets and long term charts for slowly moving markets.

Would you like to read the entire online version of Elliott Wave Principle: Key to Market Behavior for free?

If your answer is "yes," you may do so once you join Club EWI, the world's largest Elliott wave educational community. You can join Club EWI without any obligations and membership is free. Do know that Club EWI members enjoy access to a wealth of Elliott wave resources on financial markets, investing and trading. Some videos and articles are from Elliott Wave International's analysts.

Sign up for a Club EWI membership now to start enjoying the benefits. Just follow this link: Elliott Wave Principle: Key to Market Behavior -- get free and instant access.

This article was syndicated by Elliott Wave International and was originally published under the headline Why a U.S. Recession May Foil Economists' Expectations. 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.

Want to "Intimidate Everybody"? Be a Bond Market

By Elliott Wave International

Back in October 2021, we showed subscribers a chart of the "Bond Universe" -- ALL bonds, from around the world, in ONE chart. Since then, as yields spiked and prices fell, the bond market has indeed been "intimidating everybody." Watch our monthly Global Market Perspective contributor, Murray Gunn, explain more.

If a picture is worth 1,000 words, a price chart is worth 1,000 Fed statements.

On May 4, at the MoneyShow Virtual Expo, EWI's Head of Global Research, Murray Gunn, showed an eager audience 30+ charts -- many going back decades.

Murray's point was simple: Let the charts do the talking.

And boy, do they.

We are in a Great Unwinding.

Do not miss this. (You can't afford to.)

30 mins, free to EWI subscribers and Club members.

You can join Club EWI for free and get instant access to the video.

This article was syndicated by Elliott Wave International and was originally published under the headline Want to "Intimidate Everybody"? Be a Bond Market. 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.

Treasury Bonds: How This Forecast is Playing Out

Here's what happened with a shelf of support in the chart of the long bond

By Elliott Wave International

The yield on U.S. Treasury bonds trended higher from 1942 to 1981 -- that's 39 years.

Interestingly, yields (or interest rates) then trended lower for 39 years (1981 to 2020).

Thirty-nine years is quite a long time -- well long enough for observers to get used to the idea of exceptionally low yields, even the Fed.

Indeed, here's a Sept. 16, 2020 headline from the Wall Street Journal:

Fed Signals Low Rates Likely to Last Several Years

Elliott Wave International President Robert Prechter had an entirely different perspective. Here's what he said just a week later in his Sept. 23, 2020 issue of The Elliott Wave Theorist, a monthly publication which provides analysis of major financial and cultural trends:

On September 16, Fed Chairman Powell [said] he expected short term interest rates to stay near zero as long as inflation stays below 2%, a condition he believes will maintain ... through "the end of 2023." I think there is not a chance in the world of that scenario playing out. ... The probability is high that interest rates have begun a process of rising. ... [emphasis added]

As we all know, interest rates or yields have risen substantially since 2020.

This chart and commentary from the May 19, 2023 Elliott Wave Theorist provide an update (Keep in mind that Elliott wave labeling is available to subscribers):

Treasury bond futures have been slipping again. As you can see in [the chart], bond prices broke a shelf of support this week and traded today at their lowest level in ten weeks. A debt crisis is brewing, and higher long term interest rates will add to the pressure.

Yes, servicing public and private debt is getting a lot more expensive. And that debt has been increasing dramatically and rapidly (CNBC, May 18):

The global debt pile grew by $8.3 trillion in the first quarter to a near-record high of $305 trillion ... .

Getting back to the price pattern of the U.S. Treasury Long Bond, Elliott wave analysis can help you determine what's next.

Of course, no method of analyzing financial markets can offer a guarantee, but Elliott Wave International knows of no other method which surpasses the usefulness of the Elliott wave model.

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

Without Elliott, there appear to be an infinite number of possibilities for market action. What the Wave Principle provides is a means of first limiting the possibilities and then ordering the relative probabilities of possible future market paths. Elliott's highly specific rules reduce the number of valid alternatives to a minimum. Among those, the best interpretation, sometimes called the "preferred count," is the one that satisfies the largest number of guidelines. Other interpretations are ordered accordingly. As a result, competent analysts applying the rules and guidelines of the Wave Principle objectively should usually agree on both the list of possibilities and the order of probabilities for various possible outcomes at any particular time. That order can usually be stated with certainty. Do not assume, however, that certainty about the order of probabilities is the same as certainty about one specific outcome. Under only the rarest of circumstances do you ever know exactly what the market is going to do. You must understand and accept that even an approach that can identify high odds for a fairly specific event must be wrong some of the time.

If you'd like to read the entire online version of the book, you may do so for free once you become a member of Club EWI, the world's largest Elliott wave educational community.

A Club EWI membership is also free.

Get started right away by following this link: Elliott Wave Principle: Key to Market Behavior -- get free access.

This article was syndicated by Elliott Wave International and was originally published under the headline Treasury Bonds: How This Forecast is Playing Out. 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.