Seeking Alpha has an excellent article on why the high-yield bond funds HYG and JNK are being misused to call market tops. The author correctly showed that you need to look at the composition of the bond funds to determine if the decline is predicting a stock market fall. For example, the highest allocation of HYG stocks is currently in the oil and gas sector which is experiencing a large pullback. So, the HYG chart simply indicates that one of its prominent sectors is temporarily down.
Secondly, the author stated that if you are comparing government bonds to junk bonds to predict a top, you should not use TLT because the long-term government bond has a much different maturity time frame than HYG or JNK. It would be more accurate to compare the shorter term government bond funds IEF and IEI to HYG to decide if there is a run to safety. I agree with the author although I believe we are getting close to a market top. 2015 will most likely be a volatile year, but a stock market bear phase is probably around two years away. I plan to buy UDOW whenever it dips back toward $110 per share, and I will sell the stock when it gets somewhere over $130 per share as long as the main trend of the market is up.
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