What The Junk Market May Be Telling Us About Stocks

The question facing investors in the equity markets is one they have had to grapple with all summer as stocks kept marching higher and higher: Is there too much froth in the market?

A look at some traditional technical indicators seem to be offering mixed signals. The RSI of major equity indicators is clearly in the overbought level. Yet, the MACD keeps screaming "BUY." And the Markov Process, a momentum indicator that we use at Excalibur Pro, keeps showing weak bull and strong bear signals for the most part - but it has been doing this as the markets have stormed higher.

So, it might be time to look at another barometer of risk that is not related to equities to get a feel for where the markets ,may be headed: junk bonds. Using the HYG ETF as our proxy, we see technical and momentum indicators that consistently urge caution - an RSI number below the overbought condition; a MACD signal that is at the "sell" level; a "weak" Markov bull signal, and, a negative histogram value.

The chart below shows values as of end of day Sept. 2. And the histogram range is from end of August through Sept. 2.