Signs of woe for US stocks…

<p>The S&P 500 is testing key 200-day support on Wednesday after slipping to the bottom of its range on the back of a global bout […]</p>

The S&P 500 is testing key 200-day support on Wednesday after slipping to the bottom of its range on the back of a global bout of risk aversion triggered by further declines in the Chinese stock market. However, we have started to notice a few ominous signs closer to home that could make the rest of Q3 and Q4 more difficult terrain for stock investors to navigate.

We think that investors should be watching two charts right now, which could spell a more serious period of unrest for US stocks.

1, US high yield corporate debt

High yield corporate debt is considered a bell weather for investor risk sentiment, so when it starts to show signs of stress, stock investors should take note. The chart below shows the Bloomberg high yield US corporate debt index and the Vix index, a measure of volatility in the S&P 500. This chart has been normalised, and as you can see, these two indices have generally traded in the same direction over the last year.

However, the high yield debt index has accelerated in recent weeks, as investors have charged more to hold the riskiest end of the US corporate debt market, it overtook the Vix in mid-July. The debt index is now at its highest level since December 2014, if this relationship is to hold then we could see further upside for the Vix. This is important for the S&P 500, since the Vix tends to have an inverse correlation with the S&P 500, thus if the Vix rises we may see the S&P 500 come under further downward pressure.

Figure 1:


Source: Gain Capital, Data: Bloomberg

2, Apple

The tech giant, and the world’s most valuable company, has seen its share price struggle in recent months after peaking on 28th April, one month since its inception into the Dow Jones. The stock price is now below its 200-day sma and is nearly 15% below its April peak. This matters a lot to the Dow Jones Industrial Average, since this index is weighted according to market capitalisation. This means that when highly valued companies like Apple fall sharply it can have a big downward impact on the index.

Figure 2 shows Apple’s share price alongside the Dow Jones. This chart has been normalised to show how the two move together. There are two things to note about this chart: firstly, the Dow has underperformed Apple since Q4 2014, secondly, since Apple’s sharp slide in July, this has corresponded with a weakening in the overall Dow Index.

To conclude, if Apple’s share price falls into bear market territory (a drop of 20% or more), then we could see further weakness for the Dow, which is already below a cluster of moving average support and is close to its lowest level since February, leaving it technically vulnerable to further losses.

Figure 2:


Source: Gain Capital, Data: Bloomberg

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.