The SPDR Barclays High Yield Bond ETF (JNK) - Get SPDR Bloomberg High Yield Bond ETF Report is a benchmark exchange-traded fund that investors should track using daily and weekly technical charts. Both charts indicate allocations to junk bonds should have been avoided in 2015.
Overly simplified, junk bonds are backed by companies with a less-than-stellar credit rating. For example, a bond carrying a Standard & Poor's rating of BB or lower is considered a junk bond, which has a much higher risk of default than an investment-grade bond.
During the recovery from the financial crisis, investors seeking yields higher than U.S. Treasuries bought risky junk bonds, or junk bond funds not realizing the risk of widening spreads versus the U.S. Treasury yield curve or default.
Investors who bought the junk bond ETF have fared better than most individual bonds and mutual funds because the ETF trades like a stock.
Here's the daily chart for the Barclays High Yield Bond ETF.
Courtesy of MetaStock Xenith
The ETF is trading around $34 after closing down 6.3% so far in the fourth quarter and down 13.4% year to date. It is in bear market territory 20.3% below its multiyear high of $41.95 set on May 10, 2013.
Investors charting the ETF on the daily chart would have at least reduced position when the 50-day simple moving average declined below the 200-day simple moving average in what chartists call a "death cross". This occurred on Sept. 15, 2014 when the junk bond closed at $40.55.
By definition, a "death cross" indicates lower prices lie ahead and that proved to be the case for the junk bond ETF. Today, the 50-day and 200-day simple moving averages are now $35.69 and $37.63, respectively.
Here's the weekly chart.
Courtesy of MetaStock Xenith
The weekly chart for the junk bond ETF is negative but oversold with the ETF below its key weekly moving average of $35.05 and well below its 200-week simple moving average of $39.71. The weekly momentum reading is projected to decline to 15.14 this week down from 17.62 on Dec. 11, which is deeper below the oversold threshold of 80.00.
Momentum scales from 00.00 to 100.00 with a reading below 20.00 oversold and a reading above 80.00 overbought. A rising reading above 20.0 is positive while a declining reading below 80.00 is negative. This study is shown in red along the bottom of the chart.
The chart shows a liquidation signal as early as the week of May 31, 2013 when the ETF closed at $40.58. This close was below the key weekly moving average just three weeks after the multi-year high. Completing this signal is that the momentum reading was declining below the overbought threshold of 80.00.
After the ETF rebounded off a low of $38.21 during the week of June 28, 2013, the ETF set a secondary high of 41.81 during the week of June 27, 2014. This was followed by another liquidation signal at the close of $41.14 the week of July 18, 2014.
Once the junk bond ETF could not stay above its 200-week simple moving average between the week of Oct. 10, 2014 and the week of Nov. 14, 2014, the chart showed that exposures to junk bonds in 2015 should be avoided.
Investors looking to reduce holdings in the junk bond ETF should place a good till canceled limit order to sell the ETF if it rises to $35.25 and $38.24, which are key levels on technical charts until the end of 2015.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.