Demand for corporate high-yield debt is rolling over while stocks continue to rise, a divergence that may signal a fading appetite for risk.
In the past two weeks, the SPDR S&P 500 exchanged-traded fund (SPY) is up about 1 percent compared with a 1.5 percent drop for the iShares High Yield Corporate Bond ETF (HYG).
So far in 2013, the divergence is even more pronounced, with the HYG recently turning negative while the SPY remains up about 6 percent.
Investors often track high-yield bonds in an effort to gauge risk appetite and predict any potential turns in market sentiment.
Thus, could the recent divergence between high-yield corporate bonds and equities signal cautiousness ahead?
The 30-day rolling correlation between the HYG and SPY recently crossed below -0.25, the lowest level since August 2008. There has been only five other instances that this happened since 2007. And in four of those times, the SPY was down within a month.
In August 2008, for example, after the correlation recorded -0.28 for the first time in a year, the SPY sold-off nearly 7 percent within a month. During another instance in July 2007, the SPY fell more than 3 percent after the correlation recorded less than -0.25.