One of the more useful features of DeMark indicators is that they can be applied to any security or index. So with the corporate bond market in a continued state of frenzy, and on the heels of Apple’s
(NASDAQ:AAPL) sale of one of the largest bond issues in history, it may be worthwhile to look at where corporate yields stand in the context of DeMark counts. After all, while most traders play in the equity markets, I’ve repeated ad nauseam the notion that what is happening to stocks is very closely tied to what is happening with corporate bonds. See here
for more on that topic. (And thanks again to Rosenblatt’s Brian Reynolds for all his lessons through the years.)
My reference index is the Barclays US Corporate High Yield to Worst index (LF98YW on Bloomberg). As usual, DeMark indicators are best looked at on different time frames, but considering that bonds are almost by definition long-dated investments (or at least longer dated than equities), I will take the daily, weekly, and monthly time frames in reverse order.
The monthly chart above goes back to 1998 and I’ve marked with yellow numbers the TD Setups and the TD Combo Countdown counts, to highlight whether in fact those indicators served as useful tells. Indeed, except for the early 2000 TD Sell Setup (No. 1), the mid-2003 TD Buy Setup (not marked), and the TD Sell Setup of early 2008 (No. 4), all the other signals worked as anticipated. Some were more successful than others. The TD Combo Countdown Buy of early 2004 (No. 2), which at the time marked a new low in HY spreads, led into a multi-year sideways pattern, where bonds enjoyed a persistent bid and corresponding low yields. The two home-run trades were the TD Buy Setup of mid 2007, which would have gotten you out / short bonds, and the TD Combo Countdown Sell of late 2008, which argued for getting long/covering short (No. 3 and No. 5). As an aside, note the divergence between HY spreads and what would be the S&P 500
(INDEXSP:.INX) bottom in March of 2009: By the end of January of 2009 spreads had already dropped a sharp 380 basis points, as money once again started flowing into corporates. The TD Combo Countdown Buy and TD Buy Setup of late 2010 and mid-2011, would have spared bond holders the EU scare (No. 6 and No. 7), but it would have taken a fair amount of sophistication to interpret that the failure to print a TD Sell Setup in the opposite direction (as you can tell there were no completed counts at the late 2011 yield highs) was the signal to get back into bonds, as the momentum behind higher spreads didn’t have enough juice to reverse the longer term trend. Which brings us to where we are today; with a completed TD Buy Setup, the TD Combo Countdown Buy on bar 11, and both in the context of new all-time low yields, what are these counts telling us? It basically confirms what we already know, which is that buyers are buying bonds at any price. Is it sustainable? Is this circle No. 2 (in early 2004) or circle No. 3 in mid-2007? There’s no substitute for watching the bond market day after day and week after week, and letting it tell us if the buyers continue to overwhelm new issuers, but DeMark charts on shorter time frames can also shed light on the ongoing intensity of the trend and of potential countertrend moves.
Reassuringly, on the weekly time frame you can see that despite the ups and downs of various macro scares, not once have bond sellers been able to complete a single TD Sell Setup, while every backup in yields ultimately gets bought all the way through completed TD Buy Setups and TD Combo Countdown Buys.
And a similar message comes from the daily chart, which has managed to complete only two TD Sell Setups in the last year (the last two yellow circles) and the last one was not even strong enough to print on a “Perfected” basis. As I said earlier, I’m skeptical of using time frames as short as “daily” when correlating stocks to bonds, but it is at least curious to see that, as yields printed a fresh Perfected TD Buy Setup on Friday, and bar 9 of Combo Countdown Buy, the SPX also completed yet another cautionary Combo Countdown Sell with a new “risk level” of 1639.33.
Bottom line: While the corporate bond market can fairly be described as being in a frenzy, its long-term nature makes it entirely possible that the frenzy can be sustained for years, as was the case in 2004. Charts on weekly time frames should give us decent heads up if any trend changes are developing, and here I cannot stress enough the importance of watching not just the completion of various counts, but also the corresponding “risk levels”, i.e. the levels beyond which a completed Buy or Sell Setup is invalidated by the strength of the underlying move (see this brief DeMark primer
for more on the indicators and how to use them). If you don’t believe me, respecting the risk level following the early 2008 failed monthly TD Sell Setup (circle No. 4 on the monthly chart) would have minimized otherwise huge losses, or better, would have gotten traders to short bonds for the meat of the 2008 bond debacle. For now however, the bulls remains squarely in control of the corporate bond market which, but for random zigzags, will continue to pump cash into equities.
Position in AAPL SPX
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