Wednesday, July 23, 2014

Time to Profit From the Junk-Bond Market Insanity: HYG

The junk-bond market has broken down.

For the past year, junk bonds (corporate debt that is rated lower than investment grade) have been in rally mode. The iShares High Yield Corporate Bond Fund (HYG) was up 13% from its low last June to its high last month.

Yet the spread between investment-grade bond yields and junk-bond yields is among the lowest in history. Investors aren't getting paid for taking on the extra risk of corporations having a difficult time making payments on their junk bonds when times are tough.

We said junk-bond investors were going to get hurt when reality finally set in and the junk-bond insanity ended. But it was still too early to bet on a decline in the market. Today, junk bonds are starting to break down. And it's time to set yourself up to profit…

Although we said buying junk bonds was a bad bet in May, we also said shorting junk bonds was a bad bet.

HYG had been in a bearish rising-wedge pattern for most of the past year. This pattern develops as a chart makes higher highs and higher lows, but the distance between the highs and lows shrinks. Most of the time, this pattern breaks to the downside. But HYG had just made a new all-time high. And there was still room for HYG to work even higher inside of the wedge.

You see, bouts of insanity can hang on a lot longer than most folks think is possible. So as tempting as it was to try to short junk bonds at their insane levels, the setup wasn't right. It was too early.

It's not too early anymore.

Take a look at this updated chart of HYG…

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HYG broke down from the rising-wedge pattern. It also broke below its 50-day moving average (DMA). Most technical analysts view the 50-DMA as the line in the sand separating intermediate-term uptrends from intermediate-term downtrends.

Junk bonds broke below the line last week. The intermediate-term trend is now bearish. And with junk bonds trading at historically high values, there's plenty of room to fall.

Traders should look to short the sector as HYG bounces toward its 50-DMA. Set a stop just above the 50-DMA in order to limit the risk of the trade. 

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FedEx Corporation (NYSE: FDX)

FedEx Corporation provides transportation, e-commerce, and business services in the United States and internationally. The company’s FedEx Express segment provides various shipping services for the delivery of packages and freight. Its FedEx Ground segment provides business and residential money-back guaranteed ground package delivery services. The company’s FedEx Freight segment offers less-than-truckload freight services, as well as freight-shipping services. Its FedEx Services segment provides sales, marketing, information technology, communications, customer service, and other back-office support services.
To review FedEx’s stock, please take a look at the 1-year chart of (NYXE: FDX)
1-year chart of (NYXE: FDX)
FDX had been trending sideways from November until June. During that time, the stock had hit at 52-week high resistance at $145 twice (blue). Since breaking higher, FDX has hit support at $150 (green) and resistance at $155 (red). All combined, the stock’s reaction to the increments of $5 should provide traders with the most ideal entry points.

The Tale of the Tape: FDX broke through its 52-week high resistance level of $145 and is now trading between $150 and $155. A long trade could be made on a pullback down to the $150 level, or on a move above $155, with a stop placed below the level of entry.
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Euro Currency Breakdown

We have been watching the Euro closely here over the past few weeks and have noted that the 1.35 level has been a strong support zone on its price chart that has held the currency's downside for the last 8 months.

Today it broke through this strong level of support. As long as it held that zone, the range trade which had contained it was still intact. The top of the range was up between 1.39 - 1.40. The bottom was at or near 1.35.  (more)
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3 reasons silver isn’t the same as gold /
Many investors who remain cautious on gold wonder whether they should get their precious metal exposure through silver instead. In response, Russ explains why the two metals aren’t interchangeable.
In recent weeks, many investors reluctant to add to their gold positions are asking me if they would be better off getting their exposure to precious metals through silver instead.
While I don’t have strong views on the direction of silver prices, I think it’s important to distinguish between gold (IAU) and silver (SLV) rather than assume that the two metals are interchangeable.
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Petrobras (NYSE: PBR) Beaten-Down Oil Stock Poised for a Rebound

Brazilian integrated oil and gas company Petrobras (NYSE: PBR) rallied 6.6% on Friday in a technically significant move. The stock broke past near-term lateral resistance, as well as a series of long-, medium- and near-term diagonal resistance lines, and looks poised to rally further in coming weeks.
On Thursday, news broke that Petrobras is in talks with Brazilian electricity company Companhia Energ (NYSE: CIG) to sell it a 40% stake in natural gas distributor Gasmig worth $270 million.

Petrobras, whose share price has been on a near constant decline for years, is looking to shed non-core and low-yielding assets. The company has incurred billions in operational losses in recent years because Brazilian president Dilma Rousseff used it to subsidize fuel imports in order to hold down inflation. Rousseff's decreasing popularity among voters may also have contributed to last week's rally in PBR.  (more)

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