THE BIG IDEA
The high yield bond market is small compared to its more respectable investment grade peers. Still, these so-called “junk” bonds can be useful to monitor for clues about the future direction of the stock market.
On the surface, junk bonds are no different than bonds issued by ExxonMobil or the U.S. Treasury. However, they tend to rise and fall together with the stock market instead of doing whatever the bond market is doing.
At Swingex, we track the advance-decline line for junk bonds. If for some reason, you do not concern yourself with advance-decline lines, the concept is really simple. Each day, you take the number of risers and subtract the number of fallers, then apply the result to the previous total. If 700 high yield bonds go up and 800 go down, then the advance-decline line moves down by 100 that day.
In the chart below you see the S&P 500 in black and the advance-decline line for high yield bonds in green. The absolute levels of the numbers are less important than noticing that the two assets tend to peak at the same time and hit bottom at the same time.
Sometimes stocks and junk bonds don’t agree about what is happening and that is where the value is monitoring the junk bonds. When they disagree, it is the junk bonds that usually end up winning the argument.
A good example of this happened in the summer of 2024. The stock market was weakening and reached a climactic selloff as people started freaking out about interest rates in Japan (yes, really). The high yield bond market, though, ignored all of this and held steady, even rising a bit.
This was a strong sign that stocks were probably not headed for a bear market. The stock market did, in fact, turn around and we all rejoiced.
This all leads us to the present day. Our third, and final, chart covers 2026 up to now. If you have been paying attention to this post so far and understand how things “should” look, you will recognize the usual pattern of stocks and junk bonds running in the same direction.
And then, about three-quarters of the way across the chart, something weird happens.
Why is the high yield bond advance-decline line flat or even down while the stock market charges higher? If they are going to get back in sync, which one do you think will change course?
History tells us that most investors are not going to like the answer.
SEEN ON THE INTERNETS
Sometimes stock market analysts and/or economists like to look for historical precedents that resemble the current situation.
Such is the case of this post by James Lavish on social media. The full text of his post is “Can I say something?”. That’s probably because the chart below speaks for itself.
Historical similarities like this one don’t prove that another wave of inflation is inevitable. Patterns of human behavior, though, don’t change much.
One thing that does change is the head of the Federal Reserve. The new guy in charge was nominated for the job largely because he got the idea from… somewhere… that money should be cheaper to borrow. That’s the sort of thing that makes prices go up.
We’ll see what happens.
NUMBERS ONLY
SWINGEX INDEX
As of market close on: 15 May 2026
Swingy says: Whew! One strong flush of hot money has the index back above zero.
Learn more about how the Swingex Index works here.
WATCHER
Stocks highlighted here each week are not recommendations to buy or sell. They are provided as ideas for swing traders to follow up on with their own research.
HPK (HighPeak Energy): You could guess that a company called HighPeak would be found in a mountainous area. You would be wrong! HPK is an energy exploration company operating in the Midland Basin in Texas.
We’re showing the chart in a different format this week. Since we are focused on short-term swing trades, we often show a daily chart. This time we are going with a weekly view. The weekly chart more clearly shows what has us interested in the stock.
The region around $7 has acted as both a floor and a ceiling for HPK. It temporarily stopped last year’s downtrend. More important for our interests, it has so far been a tough barrier to crack to the upside in recent months. As energy prices remain high, we’re betting that the sellers will soon finish selling (or just change their minds) and the shares will be primed to head higher.
The stock does tend to have a lot of day-to-day volatility. If you don’t get scared off by that, you might be rewarded with some solid gains.