As you already know, energy stocks and high yield bonds have collapsed relative to the overall stock market this past year.
In the next chart, the XOP and XLE average and HYG followed US Oil to the downside and broke down. (I added the BofA/ML High Yield Option-Adjusted Spread as well.) The stock market average is still trending higher in its ascending channel from the 2009 low. I think we need to see how stock prices and credit and equity risk measures react to the potential rate hike next week to determine if the overall market is a strong sell. Everyone is trying to time the end of this up-cycle to the exact day. When this index breaks down, look out below, or stick to specific sectors. At that point it will only be a stock picker's market, in my opinion. Soon energy indexes will be strong buys regardless of where the S&P is.
Earlier this year, AllianceBernstein and Carl Icahn both warned that high yield etfs were very risky because of liquidity risk and their energy allocations.
Via AllianceBernstein on November 16, 2015:
Investors got a sneak preview of this late last year when bonds from energy companies fell sharply along with the price of oil. For years, energy companies had been on a borrowing binge to finance investment in shale gas in the US and Canada. By 2014, they accounted for a bigger share of the Barclays US High Yield Very Liquid Index than any other sector. ( Display)
But when oil prices plunged, many firms’ exploration and production operations were no longer profitable, and their plight was made worse by the added cost of servicing their debt. Active managers could have stopped adding to their positions as the energy sector’s share of the index grew. That option wasn’t available to ETF investors.
1. Could High Yield ETFs Be The Next CDOs? (11/16/2015)
2. To Keep Bad Spirits At Bay, Avoid CCC Corporates (11/2/2015)
3. The Bond Liquidity Crunch—And What To Do About It (9/21/2015)
4. Watch SJB If Carl Icahn Is Right about High Yield Bonds (6/25/2015)
5. Carl Icahn: "There Really Is A Bubble Brewing" (6/21/2015)