Timing A Move Out Of Stocks, As They Whip Around And Bond Spreads Blow Out

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Bond blowout

The riskiest segment of the corporate bond market has been suffering, while safer bonds have been less of a focus for sellers.

That raises the specter that some of the most economically sensitive investors in the market are seeing warning signs and getting out early. They haven’t been a consistent group to follow. The four times it happened, stocks rallied over the next two months three times, one of which rolled over into large losses. The one that showed a loss a couple of months later turned into a gain.

A whippy few weeks

The S&P 500 has endured a daily change of more than 0.75% for most of the past 15 sessions. That’s not an unusual amount of volatility during a bear market, but it is a high level when relatively near a high.

This did happen as stocks were forming a major top in 1929, 2000, and 2007, but it failed to lead to a large decline far more often. And even when we did see this kind of volatility cluster those years, the S&P still managed to rise over the next month each time.

A leading new high

The Conference Board Leading Economic Index - a popular leading economic indicator for the U.S. economy - has made a new all-time high.

One way to judge the Conference Board LEI's trend is to look at its 6 month moving average, and whether this average is going up or down.

The following chart looks at:

S&P 500
1. Buy and hold the S&P 500 if the Conference Board LEI is going up. Otherwise, sell and shift into cash.
2. Buy and hold the S&P 500 if the Conference Board LEI is going up. Otherwise, sell and shift into the Bloomberg Barclays U.S. Aggregate Bond Index
3. Buy and hold the S&P 500 if the Conference Board LEI is going up. Otherwise, sell and shift into the Bloomberg Barclays U.S. Corporate Bond Index
4. Buy and hold the S&P 500 if the Conference Board LEI is going up. Otherwise, sell and shift into the Bloomberg Barclays U.S. Treasury Bond Index
5. Buy and hold the S&P 500 if the Conference Board LEI is going up. Otherwise, sell and shift into gold.

With the Conference Board LEI making new highs, this strategy remains a BUY right now (Conference Board LEI's 6 month average is going up).

World exodus

Investors have been selling overseas equities week after week (after week after week…). The selling stretch over the past 3 months is about the most severe since the financial crisis, and it’s even creeping up on that.

Almost perfect

After hitting a 30-day low a week ago, the Dow Industrials Average has seen 3 of the 5 sessions with more than 25 of its members rising on the day. Of the 9 other times that’s happened since 1996, the Dow continued to rise 8 times over the next 2 weeks.