Junk-Bond Rally May Signal Stocks Will Rise Until Year-End, Strategas Says

The rally in high-yield debt to near 2010 highs may be a signal the U.S. stock market will continue its climb until the end of the year, according to Strategas Research Partners.

The Barclays Capital High-Yield Bond exchange-traded fund bottomed in May, six weeks before the Standard & Poor’s 500 Index fell to a 10-month low on July 2. That continues a pattern in which “credit has provided a valuable leading signal for the equity markets over the last three years,” Christopher Verrone, lead technical analyst at Strategas, said in a report today.

“Bullish things are happening under the surface and around us,” New York-based Verrone said in an interview. “I wouldn’t be surprised if the market challenged the high it hit in April.”

The S&P 500 has retreated 6.4 percent since April 23, when the benchmark measure of U.S. stocks rallied to a 19-month high. The high-yield ETF is within 1.2 percent of its year-to-date peak. Verrone said this signals equities will keep rebounding. The S&P 500 has already risen 11 percent from its 2010 low on July 2, to 1,139.31.

“The U.S. equity market has room to play catch-up into year-end,” Verrone said, because “groups typically associated with U.S. equity strength” including the U.K.’s FTSE 100 Index, Korea’s Kospi Index, the Australian dollar and copper are “breaking out” above their trading ranges from the last few months.

Average prices on high-yield debt rose above 100 cents on the dollar on Sept. 16 for the first time since June 2007 after falling as low as 55 cents in December 2008, Bank of America Merrill Lynch index data show. Junk bonds reached 100.3 cents on the dollar as of yesterday.

Technical analysts use trading patterns and prices to predict changes in a security, commodity, currency or index.

To contact the reporter on this story: Inyoung Hwang at ihwang7@bloomberg.net.

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.

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