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Ethiopian Muslims are celebrating the Eid al-Fitr Holiday with various religious ceremonies across the nation. courtesy image Ethiopian Muslims gathered in large numbers in the country’s capital, Addis Ababa, for the annual Grand Street Iftar, the meal that Muslims have when they break their fast in Ramadan. Preparations for the event unfolded throughout Wednesday and members of the community…

In the weekly bar chart of the Utility Sector Index (UTY) above, seasonal strength (lower pane, shaded in yellow) typically begins following an early or mid-March bottom and usually lasts through early October although the bulk of the move is typically done sometime in May or early June (blue arrow).

Retirees and other investors are reaching farther and farther for yield. They’re piling into all sorts of increasingly risky investments. So, it should come as no surprise that credit spreads are shrinking between what in theory are risk-free investments and other investments.

My friend Danielle DiMartino Booth, formerly at the Dallas Fed, covers a range of topics affected by central-bank policies. I think she is going to be an increasingly visible force in the world of central bank critics.

Danielle deals with credit spreads—specifically high-yield bonds—in the article below. She urges, “This is important folks, your sweet grandparents could well own junk bonds in their desperate need to generate yield on their atrophying retirement funds!”

It’s not a long piece, and it’s easy reading, even if it won’t make you comfortable.

The Bond Market: Beware of Junkyard Dogs

By Danielle DiMartino Booth

Having spent a chunk of his youth “shopping” them, Jim Croce came to know a thing or two about junkyards. In those youthful days, should his clunker de jour be missing some vital part or parts, a trolling expedition through South Philly’s scrap heaps was always the enterprising Croce’s preferred method of procurement.

Amid all of Croce’s parts foraging, it was a universal joint for a ‘57 Chevy and a ‘51 Dodge transmission, two must have and must-be-cheap or, better yet, free, parts that the legendary folk singer still recalled. He also reminisced that junkyards could and would provide a no frills, but highly motivated and easy way to get in some cardio, as in running for your life.

“I got to know many junkyards well, and they all have dogs in them,” the late Croce said in a 1973 interview. “They all have either an axle tied around their necks or an old lawnmower to keep ‘em at least slowed down a bit, so you have a decent chance of getting away from them.”

So was born the junkyard dog yardstick by which to measure the meanness of one Bad, Bad Leroy Brown, Croce’s hit which landed at the top of the charts 42 years ago this week.

As for high yield bond analysts, they aren’t exactly known for catchy turns of phrase. However, in recent weeks, they’ve shed the dry and donned the dramatic, as you’ll soon see. Such is the overheated state of the junk bond market this sweltering summer.

In his latest missive, Deutsche Bank’s Oleg Melentyev, arguably the best-in-class high yield analyst among his sell-side peers, warned of the perils of investing in this “frenzied market.”

Legendary high yield investor Marty Fridson shares Melentyev’s concerns and has for some time. By his best estimate, high yield was already in “extreme overvaluation” territory on June 30th, defined as being one standard deviation above fair value. Flash forward two weeks, and he calculates that the standard deviation has doubled.

(A quick Statistics 101 refresher: standard deviation tells you how tightly clustered or wide-of-the-center individual components of a given data set are from their mean. Remember the grade bell curve the engineering undergrads blew in business school? When all of the test scores came in on top of each other, the bell curve was super steep; when there was vast divergence, the bell curve was low and wide.)

Defining bond valuation also requires one employ “spreads,” which compare the prevailing yields on a given credit to a supposedly risk-free Treasury of a comparable maturity. And that means you have to get down to the nitty-gritty of measuring risk in basis points (bps), or hundredths of a percentage point.

In the event your eyes have rolled into the back of your head, listen up! This is important folks, your sweet grandparents could well own junk bonds in their desperate need to generate yield on their atrophying retirement funds!

With that preamble posited, on July 15th the option-adjusted spread on Bank of America Merrill Lynch’s High Yield Index was 542 basis points. That compares to 621 bps on June 30th. The lower the spread, the less extra compensation investors are demanding for taking on the added risk of being exposed to, well, junky bonds.

Of the compression in spreads, an incredulous Fridson could only characterize the overvaluation which begat more overvaluation as, “more staggering.”

Now in light of this, just how did mom & pop investors react to the price increase? Well how else? They poured $4.4 billion into high yield mutual funds, the second highest weekly inflow on record after March 2nd’s $5.3 billion inflow.

Bloomberg caught up with yet another stunned strategist:  “They’re out there scrounging through the dumpster looking for yield,” worried Karyn Cavanaugh of Voya Capital Management. “When you have artificially low rates, you force people to go out and look for things they normally wouldn’t.”

The question is, will investor insouciance ever come back to haunt them? They, as in investors, certainly don’t seem to think so.

The Daily Shot is a must-read email proffering just about every graph that’s important for investors in one succinct one-stop shop, and it’s free. The Shot’s editor, the estimable Dr. Lev Borodovsky, is notoriously judicious with his editorial additives. So when he adds a quip, his readers understandably sit up and take note.

In Tuesday’s Shot, Borodovsky featured a graph of the VIX Index, the so-called ‘fear gauge,’ which depicts the perceived risk of owning stocks, which have traditionally moved in lockstep with junk bonds. Reflecting extreme complacency, the VIX is sitting at the lowest level since last August. “In the equity markets,” Borodovsky recapped, “the VIX hits a multi-month low. All is well.”

Or not. The Shot goes on to depict the price-to-earnings ratio on the S&P 500 at the highest level since at least 2006. “These valuations rely on extremely low long-term rates,” Borodovsky cautioned.

As a punctuation mark, as in exclamation, Borodovsky features two charts on the high yield market. At the risk of over-paraphrasing, the high yield market is apparently no longer concerned about energy prices, which have yet to stage the oft-predicted blistering rebound. How so?

Despite the defaults that continue to emanate from the oil patch, the performance of high yield bonds has completely divorced itself from that of still-depressed crude prices. The mirror image of this nonchalance is that investors are no longer demanding a premium level of compensation for owning high yield energy issuers vis-à-vis their non-energy brethren.

In priceless understatement, Borodovsky concludes that, “High yield is definitely starting to look frothy.”

As for Deutsche’s Melentyev, he isn’t bothering to wait for the ink to dry on the clear message written on the wall. In his latest note to clients, he ratchets up his expectations for HY (high yield) defaults to rise this year beyond his worst case initial scenario – and it ain’t just an energy story.

“At this point, we have little doubt that our original forecast of a 4% ex-commodity HY default rate will be met by late 2016/early 2017. Moreover, we think there are now enough reasons to believe that defaults could rise to 5%, ex-commodities, sometime over the next year or so. Coupled with our 20% commodity HY default rate forecast, we are looking at 7.25% aggregate default rate sometime around mid-2017.”

In the event you’ve fallen off Planet Earth in recent weeks, the global corporate default count, as in companies reneging on their promises to make good on those coupon payments, is at the highest level since 2009. And if your memory’s eye has erased 2009 to prevent permanent scarring, the economy was in a full meltdown state back then.

Let’s get this straight. Defaults are going through the roof and investors are flocking to the sector in record numbers? And how.

Moody’s Tiina Siilaberg keeps an eagle’s eye on the concessions investors give to issuers in the form of protections they don’t demand. They’re called ‘covenants,’ which Investopedia defines as, “designed to protect the interests of both parties. Restrictive covenants forbid the issuer from undertaking certain activities; positive covenants require the issuer to meet specific requirements.”

By Siilaberg’s latest tally, covenant protections are at their weakest level in recorded history. To translate, investors’ collective interests are as vulnerable as they’ve ever been. Though the leveraged loan market remains open for business, Siilaberg is apprehensive about what’s just over the horizon given stretched valuations.

“Issuance in the high yield bond market is still relatively weak compared to historic levels,” Siilaberg said. “I worry, though, because refinancing risk for many lower-rated issuers is close to an all-time high.”

The culprit? That would be a delusional reliance on what Melentyev refers to as, “the new narrative,” and “its apparent reliance on (a) strong monetary response.” Unconventional monetary policy is delivering, “little tangible benefit.”

Overreaching central bankers are in fact doing more harm than good at this juncture. Though small investors may not be wise to the damage being wrought, veterans of financial market warfare are weary to the point of exhaustion.

The endless waiting for Godot has apparently worn their resolve down to near nothing…with good reason. For all of central bankers’ Herculean efforts, expectations that U.S. job losses will accelerate are at a two-year high while households’ prospects for the economy over the next year have fallen to a two-year low.

Pride will surely precede the fall of the orthodoxy of today’s accepted monetary policy framework. But at what cost?

“Everyone in the world needs yield and nothing else matters,” Melentyev laments. “This has never ended in any sort of a problem before, so we can all go back to sleep.” And what happens when we’re abruptly shaken from our slumber?

Recognizing the painfully obvious, Voya’s Cavanaugh observed, “This isn’t a really normal environment.”

Thank you Chair Yellen & Co. for rendering snarling, lawn mower toting junk bond dogs cute and cuddly critters to retirees on fixed incomes.

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One down, one to go. I am talking about how this stock market now has gotten through another Federal Reserve meeting unscathed.

Yep, the Fed agreed to do nothing and that keeps stocks on the agenda as the best place for a return for your money.

I was pleased to hear that the Fed paid attention not to the ideologues who want higher rates so they can be lowered after the Fed threw us into a recession. I am glad that the Fed recognized that the economy only grew by 38,000 jobs and that mattered to the governors. I like that they recognized that the economy is on a real slow growth path and that rate hikes aren't going lockstep.

I like these things because they recognize that job creation has slowed. No, there is no recognition that it might have changed because of technology, because of digitization, because of the ease with which jobs can be transported overseas and taken away from our country. The governors still can't seem to come to grasp with something such as CNBC's disrupters -- companies that are taking away jobs by the hundreds of thousands just by their nature. Look at your cellphone. Look at those apps and icons. They represent millions of jobs taken away, with everything from clerical jobs to calendars to sports programming to P.C. makers and camera companies being eviscerated.

Still, I am glad that they are giving the rest of the economy a chance to catch up, perhaps while the paralysis in Washington runs its course. I also am thrilled that the Fed took no action that would boost the dollar. Right now it is unchanged versus many currencies year over year. That's good news as we wind down the corporate quarter.

Look, I wish that the economy were growing and creating all sorts of jobs. Then we could raise rates and the stock market could handle it. But that sure wasn't the case in December when the Fed raised and the stock market got hammered. And Janet Yellen was on point when she said the job growth has slowed despite some pick-up in the economy, an anomaly that means getting more out of fewer people.

But I think the Fed isn't being clever. The Fed owns trillions of dollars in U.S. bonds. As colleague and writing partner Matt Horween points out, we have a worldwide shortage in all treasuries and only the Fed is sitting on a vast storehouse of them. Why not have the Fed selloff these treasuries, which gradually would allow interest rates to rise from the supply, and it could accomplish what it wanted, make a huge profit for the Treasury and get rid of the craziness of negative rates worldwide.

This could be the biggest win of all time and eliminate the biggest worry the Fed has -- all of those bonds! I have heard talk that this wouldn't be right, that the Fed has to own these bonds to maturity. It's really the opposite, though. If the Fed took the extraordinary act of buying treasuries in the open market to get the economy to a better place, it can take the far less extraordinary act of selling them in the open market to gradually raise rates while ringing the register and solving the dilemma of a dearth of worldwide risk-free assets. There is no rule, no law that says the Fed can't do this.

Sometimes being creative is better than standing pat, and that's what the Fed needs to be to get us out of this jam.

Which brings me to the second of the two hurdles this market has to go through: the coming decision in Britain about leaving or staying in the European Union.

I believe that uncertainty about this issue as well as the price of oil -- more on that in a moment -- explain why we didn't have our usual explosion higher in stock prices after the meeting ended without a rate rise.

Now I think more people are worried about this British vote than they would be otherwise because they sure weren't worried not that long ago. I believe that many of the scary stories we hear about what could occur are being circulated by people who ignored or dismissed this very possibility not that long ago and don't want to look like idiots.

The rhetoric is pretty terrifying. I saw research today predicting that the stocks of the big British banks are going to fall 40% if Brits vote to leave.

Here's where I come out on this. We could have a couple of day buying opportunities in high-yield stocks like the utilities and the real estate investment trusts that could be a godsend. You might get your chance to buy AT&T or General Mills or Bristol-Myers Squibb or Pfizer at prices that are ludicrous. I would stand there and buy all the Dominion or American Electric Power -- which is part of our Action Alerts PLUS portfolio -- or Con Ed there is to buy. I can imagine being at my old hedge fund bidding, literally bidding for a million shares of any one of these stocks if the vote goes down badly. I could see grabbing the phone and shouting, "Seventy-seven bid for one million shares of ConEd, right on the line, come on, hit me."

Yet, I don't hear that kind of talk. All I hear is fear.

So all I can say is when everyone is scared you have to worry that you are going to miss the opportunity, not get a good one. Or, to put it another way, with Johnson & Johnson at $116 it would be gift to get that stock under $110 because of Brexit, but that's a gift I bet you never get. AT&T hit a 52-week high today and it yields 4.74% when the 10-year treasury yields a third of that. The stock is at $40. Now that it owns Direct TV it is more levered to the New York Giants and the Chicago Bears than it is to Brexit. If you can get that stock at $38 either before or after Brexit, take it.

Recall that these big hedge fund managers find it so easy to say there could be a 10% to 20% decline in stocks, but they find it impossible to name a stock that they would buy if it were to come down that much.

That's typical, and it's a sign of how unhelpful these siren singers with their jeremiads really are.

Now, I am not calm about Brexit. I am simply saying get ready for the next day down. However, if we are down 3% to 5% ahead of the vote, I am going to ask you to buy stocks that yield 3.5% ahead of the vote and then buy some more after.

What keeps me from saying get aggressive right now?

Simple: oil.

We were rallying just fine today off the Fed when oil turned down, and I have to tell you that the wall of $50 is less likely to be banged than the floor of $45. When oil goes down, the S&P goes down. There was a moment where the Dow swooned 40 points and I checked everywhere to find out why. There was only one reason -- oil turned negative.

We got our big oil inventory numbers today and they showed a further drop in production in this country, which makes the $45 level one that could provide support. Nevertheless, with the Fed on hold and Brexit not for another week, crude is what matters, which is a variable that's hard to game.

Anyway, with the Fed out of the picture but oil playing havoc and Brexit coming up, we can only remain cautious until oil drops three bucks and the stock market drops 3% to 5% ahead of the vote. That's when you put some of that mad money to work in higher-yielding, all-domestic equities. That's the game plan -- you just have to be ready to implement it.

...managing a small gain on very light volume, though the Nasdaq jumped late day on a WSJ report that INTC in talks to buy rival semi maker ALTR http://goo.gl/nEyDrP, lifting battered semi stocks. Equities have fallen the last few days after the latest bout of softer data pointed to a potential U.S. slowdown, slowing earnings in the S&P, and as Federal Reserve members continue to suggest a rate hike will occur this year (despite the bond/equity market telling us otherwise). 

Volatility continues in the currency, commodity (oil) and bond markets as well. Earlier this morning, data was in-line with forecasts, with GDP for quarter at 2.2%, but potentially more onerous, corporate profits fell in Q4 and posted the first annual decline since the middle of the last recession. European stocks finished higher Friday, but the region’s key benchmark saw its lengthy string of weekly wins come to an end; Germany’s DAX logs first weekly loss in 2 months.

5 Trade ideas excerpted from the detailed analysis and plan for premium subscribers.

Cerner, Ticker: $CERN

Cerner, $CERN, has been moving steadily higher since making a low in May. At the end of October it broke above the February high and has been consolidating there since, with the Bollinger bands now tightening.

Capital One Financial, Ticker: $COF

Capital One Financial, $COF, had one failed attempt to move over the resistance zone in September. It is back at that zone though, from a higher low and with the Bollinger bands tightening. Both the RSI and MACD are also rising , supporting a break higher.

Consolidated Edison, Ticker: $ED

Consolidated Edison, $ED, broke higher from a slow rising consolidation in October. Since the start of November it consolidated that move in a falling wedge, before breaking that to the upside Friday. The RSI is turning back up and held in the bullish zone on the pullback, while the MACD is leveling after its pullback.

Jazz Pharmaceuticals, Ticker: $JAZZ

Jazz Pharmaceuticals, $JAZZ, is breaking a year long ascending triangle pattern to the upside. The target on the pattern break takes the price to 240 over time. The RSI is rising and in the bullish zone while the MACD is about to cross up, giving a buy signal.

Johnson Controls, Ticker: $JCI

Johnson Controls, JCI, is approaching a triple top as the Bollinger bands are tightening for a price move. The RSI is pulling back from an overbought condition while the MACD has crossed down, both support a reversal lower. Watch this both ways, for a break out or a failure.

If you like what you see sign up here for how to trade these, more ideas and deeper analysis.

After reviewing over 1,000 charts, I have found some good setups for the week. These were selected and should be viewed in the context of the broad Market Macro picture reviewed Friday which, as the calendar turns to December sees the Equity markets showing signs of divergence or rotation but with continued strength.

Elsewhere look for Gold to continue lower, resuming its downtrend while Crude Oil also continues lower. The US Dollar Index and US Treasuries look strong though and are biased to continue to the upside. The Shanghai Composite is also strong and looks to continue higher while Emerging Markets are consolidating in what may be a bearish pattern.

Volatility looks to remain subdued keeping the bias higher for the equity index ETF's SPY, IWM and QQQ. Their charts show continued strength in the QQQ, with the SPY a bit stretched short term but looking good on the intermediate timeframe, while the IWM continues to consolidate in the longer consolidation range. Use this information as you prepare for the coming week and trad'em well.

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