The short side of junk bonds was a great place to be during the last two stock market declines.
Boom & Bust subscribers know this already. We recommended shorting a particular junk bond fund in late July 2011. And by October 4, just 47 trading days later, our open profits in this bond position surged to 15% as the junk bond market followed the S&P 500’s 14% decline. Harry followed a similar strategy, using a different investment tool, with his Forecast readers.
In fact, junk bonds have tracked the market for years now. Take a look…
The junk bond fund in our Boom & Bust model portfolio acted as a near perfect hedge in 2011, tracking the markets as it did. It tracked the markets with equal precision in 2008. As the S&P 500 shed more than 50% in 16 months, junk bonds dropped like a rock too, losing about 45% of their value.
Fast-forward to 2013. Since the start of the year, these two markets have diverged. Equities have marched higher. Yet junk bonds haven’t been able to mount an equally strong advance.
There could be two possible reasons for this:
1. Weakness in the junk bond market is forewarning a pending stock market correction, or…
2. Investors have developed a taste for dividend-paying stocks, in lieu of junk bonds, which are now yielding just 5%.
Either way, stay on the short side of the junk bond market.