Stock and Junk Bond Traders Hesitate Together

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Stock and Junk Bond Traders Hesitate Together

Major Moves

Boeing Company (BA) shares has plummeted following last Sunday’s sad accident of one of the company’s 737 MAX flights in Ethiopia. After starting at $371.27 – 12.13% lower than the company’s final price of $422.54 on Friday, March 8 – the stock was able to regain most of the ground it lost on Monday, rebounding all the way back up to finish at $400.01.

However, as additional governments grounded all 737 MAX jets in service, Boeing shares have fallen back to test support as traders fear whether the firm would be able to overcome the autopilot worries customers have before too many airlines cancel their reservations for the plane.

So far, Lion Air and Garuda Indonesia have told Boeing that they would reduce their 737 MAX orders, while Flyadeal (Saudi Arabia), VietJet (Vietnam), and Kenya Airways (Kenya) are actively assessing whether to adjust their existing orders.

According to Bloomberg, Boeing has outstanding orders for more than 5,000 737 MAX planes, valued at more than $600 billion. If more airlines start reducing or cancelling their orders, Boeing could be in a world of hurt as traders are forced to negatively revise their revenue and earnings growth expectations.

According to the daily stock chart for Boeing, the important price level to monitor is around $371. We won’t be able to identify the precise level of support down to the penny, as with so many other support and resistance levels, but we don’t need to be nearly that detailed.

The stock has interacted with the $371 price range on many occasions, dating back to late February 2018, when the stock encountered resistance. It encountered resistance at this level in mid-June, mid-September, and early November of 2018. In late January 2019, the stock was likewise consolidating close around this level until moving higher on Jan. 30 after the business topped earnings estimates for the fourth quarter of 2018.

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This price level is currently acting as a shaky support. Boeing has fallen below $371 in intraday trade, but has been able to rebound and close above $371 each day thus far.

Support may be maintained if the corporation can quickly repair its navigation system and get its birds back in the air. However, if Boeing stock falls and closes below $371, it would be a clear indication that traders are trimming their losses, and the price might return to its late-2018 lows.

S&P 500

The S&P 500 is still bumping up into resistance at about 2,816. After reaching a new intra-day high of 2,821.24 on Wednesday, the index did not move much Thursday, finishing at 2,808.49.

In fact, the index traded in such a narrow range today that it created a spinning-top doji. The greatest depiction of uncertainty is the spinning-top doji. They arise when traders attempt to raise prices but are unable to make much headway. They then attempt to cut the pricing but are unsuccessful. Finally, they just let prices to drift back to where they began the trading session, expecting for more of a trigger, bullish or bearish, in the following trading period.

Based on the S&P 500’s 2019 trend and the higher low it posted last week, the index still has a strong possibility of breaching higher, but it may need an economic statement or other news alert to give the stimulus.

Read more:

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Risk Indicators – Junk Bonds

Just as the S&P 500 is approaching resistance, so are trash bonds, which might mean problems for equities. Junk bonds are corporate bonds having a credit rating of BB or below from Standard & Poor’s (S&P) or Ba or lower from Moody’s. The lower the credit rating of a corporation, the more probable it is to fail on its loan.

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Junk bonds are an excellent proxy for verifying trader confidence since they need traders to believe that the economy is robust enough for the firms issuing the bonds to make good on them.

Traders seemed to have lost faith in trash bonds towards the end of 2018. However, they seem to have reversed direction in 2019. Using the SPDR Bloomberg Barclays High-Yield Bond ETF (JNK) as a proxy for junk bonds in general, you can observe the fund’s remarkable V-shaped reversal in December 2018, when junk bond prices plunged, only to completely rebound in January 2019.

After reaching a high of $35.72 three days in a row from February 26 to February 28, JNK retreated and found support around $35.40 on March 7 before continuing its rise. JNK, like the S&P 500, is now trading below resistance. This indicates that traders are not yet sufficiently confident to test fresh highs.

Read more:

The Fundamentals of High-Yield Bond Investing

High-Yield Bonds: The Pros and Cons

Are High-Risk Bonds Too Risky?

Bottom Line: Stocks and Junk Bonds Moving Together

If JNK can break past its resistance level at the same time as the S&P 500, it will be solid indication that the bullish upswing of 2019 still has plenty of energy left as Wall Street continues to climb the concern wall in the face of Brexit and US-China trade uncertainties.

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