Strengths of HY Bond AD Line | Top Advisor Corner

High-yield bonds tend to trade more closely with the stock market than with government bonds, and furthermore, these high-yield or “junk” bonds are very sensitive to liquidity conditions. That sensitivity works both ways. If you have so much money that even the lowest quality investments can make some money, it’s a sign that there will be plenty of liquidity for some time for all types of stocks. And when liquidity begins to dry up, these high-yield bonds tend to be the first victims.

In 2021, I highlighted a clear bearish divergence between the higher highs of the S&P 500 and the lower highs of the high-yield bond AD line. This was an accurate sign of liquidity problems to come in 2022. Things started to look up from the October 2022 bottom when we saw strength in this HY bond AD line, but that strength eventually led to another bearish divergence against the S&P. 500 in the summer of 2023.

Now we are seeing great strength once again, with this AD line rising at a very steep angle and phasing in with the price gains of the S&P 500. The message is that liquidity is plentiful and should remain that way for some time. There are no signs of a difference yet, and we expect to see a price difference before the real problems start. This was the record for such data FINRA published until 2005.

A note about these data: You can access them daily at this link.. FINRA doesn’t publish data until very late at night on the previous trading day because it obviously takes time to compile all the statistics. FINRA also reorganized its website, changing its format so that data could be scraped automatically by those skilled in programming. It takes time to learn how to read multiple lines of data, but if you want to replicate this chart yourself, I recommend importing the “CORP” data series. Alternatively, you can sign up for the twice-monthly McClellan Market Report or our regularly published Daily Edition on our website.