Speculative stocks have shown improvement since the late-March low in stock indexes, indicating that traders are becoming more comfortable with higher-risk segments of the market. Importantly, this behavior is not isolated to equities. High-yield bonds, which sit at the speculative end of corporate credit, are also strengthening.
One of the systems we monitor tracks the spread between new 52-week highs and lows in the high-yield space. When this measure cycles from below -5% to above 10%, it triggers a signal. Given the strong correlation between junk bonds and equities, we overlay these signals on the S&P 500 to better interpret the message coming from credit markets.
Despite a small sample size due to data limitations, similar rebounds in the 52-week high–low spread for high-yield bonds have been associated with solid S&P 500 returns and favorable win rates, especially in the initial four-week window, reinforcing a risk-on message from junk bonds.
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