Bullish on High-Yield Prices?

Posted on May 27 2016 - 10:33am by Sharpe Trade

So as we have taken time in the past to comment on High-Yield prices, we thought we could take a moment this morning to comment on our current view of High-Yield.

To review, we had been bearish on High-Yield prices, bullish on yield; from 2014.  In December of 2015 we stated at that time we saw no systemic financial risk arising from the stress High-Yield was then facing.   In March of 2016, we changed our view and have since been bullish on High Yield prices.

Hey  … sometimes you get lucky.

Now, allow me to be very clear regarding our view.

I am currently bullish on High-Yield prices, because of price.   We follow price for as long as the metrics that we use tell us to follow said price.  But we do not attempt to predict market behavior.  The markets are a complex entity.  Trying to predict where the markets will be in six months is akin to attempting to predict what the weather will be like in Prague, on October 18, 2018.   The system is far too complex to be able to predict accurately, and new unforeseen stimulus is always being added to this dynamic, continuous system.  Quite literally, the private stake of Sharpe Trade, LLC operates under a non-predictive mandate.  I am concerned about the ‘here and now’.  And in ‘the here and now’, high-yield is rallying.  The metrics we use tell us to remain bullish … today.  So we are “bullish”.

Also, please keep in mind that we do not turn any individual asset class into “angels” or “demons”.  We ourselves demonstrated how to buy an asset that was falling, and by using a non-correlated process, beat Stock Indices over a period of time.  

However …

We do exist, and derive profit from the future.  I believe it was Dennis Gartman who once said that we ‘exist’ on the ‘right side’ of any chart.  So it is only natural to give some thought to it.

And while I am bullish on high-yield prices at the moment, I am also very, very wary of these markets.  

I also believe, due to the nature of auction behavior, these are not markets for the new, at-home retail trader.  Unfortunately, instruments such as JNK and HYG attract new retail traders due to the higher dividend payment arriving each month.  And we find ourselves within an environment that I refer to as ‘yield starvation‘.  So the current drive for retail investors to find sufficient yield is rather extreme.  Unfortunately, most do not understand the nature of these instruments, and that the underlying entities trade infrequently.  Nor do they generally keep an eye on the associated risks of the landscape and environment of High-Yield.

So while bullish on high-yield prices at the moment?  I am very, very cautious.  The stories I hear arising in the chase for higher-yield are startling, to say the least.  And yes, as markets are complex entities.  Which means that new systemic risk can arise, while previously not seeming to be evident.

Briefly put?  I remain bullish today, but I have one eye on the exit.

But please keep in mind the nature of markets.  Everyone thinks they can reach the exit before everyone else.   Retail traders are usually the ones who get trampled since they are not accustomed to switching their stance as quickly as a professional trader or portfolio manager.  

Which is what drives huge swings, and is why markets behave in the same manner for eons of mankind’s existence.

We are bullish.  Cautious.  With one eye on the exit …

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