Demand for corporate high-yield debt is rolling over while stocks continue to rise, a divergence that may signal a fading appetite for risk.
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.