When you watch the market every day like most of us do, even every minute like I and many of you do, it's easy to get lost in the lines, to miss the big picture. It's easy to see a certain market behavior day in and day out and assume that this behavior will continue indefinitely, but it doesn't. The bubble buying crowd's mantra is, "
It's different this time" and just as Alan Greenspan said housing prices would never decline or Ben Bernanke said "Subprime is contained", Janet Yellen's recent observations that the market is not a cause for concern (the press conference on 6/18 after the F_O_M_C policy statement) is either clearly wrong as her predecessors were and she herself says she was blind-sided by subprime while many had warned (including myself) that housing was an unsustainable bubble. In fact I had noted that many of my neighbors and friends who were stay at home moms or home-schoolers had become real-estate speculators and when that happens, you know the party is about to end.
The case for the equity market bubble is easy, the F_E_D printed trillions over the last 5 years, expanding their balance sheet to $4 trillion dollars, much of the newly printed money was forced in to the market by the F_E_D's ZIRP (Zero Interest Rate Policy) as people searched for some way to generate a return greater than virtually zero,
this is a bubble (as most have been since 1929) of the F_E_D's making. the rationale for the bursting of the bubble is simple, without the F_E_D's easy money which is ending, there's nothing there to support the market, no economic recovery, no cap-ex spending, no consumer discretionary spending, a deceptive unemployment rate which is likely at least double the official estimate, a growing inflationary trend and quite likely a recession as we get the GDP print for Q2, a second negative print like Q1 puts the US in technical recession.
However you don't need to come here for that information, here's what I wanted to show you, largely taken from our Leading Indicators.
This is High Yield Corp. Credit intraday vs the SPX (green) which was clearly signaling the market would come down intraday as it has.
It has been a long time that we've been using HYG as an intraday or very short term leading indicator as it is an effective one. Credit markets are much better informed than equity markets, thus the saying, "Credit leads, stocks follow", which is why it is surprising to see a signal that is more than intraday or short term.
HY Corp. Credit first gave ground in May, however it is now at a leading negative divergence vs the SPX that we haven't seen for quite some time, it is by far the largest dislocation in well over a year.
Intraday high yielding Junk Credit was also signaling an intraday turn lower in the market averages, but beyond that...
It too is signaling a larger market decline.
High Yield Credit is falling apart a well
Professional sentiment has been selling off, interestingly since the end of Q2 and window dressing, this should tell you a lot about the need for window dressing, but even more about the state of the equity market if it sells off so hard at the first possible chance after window dressing is over, July 1st.
Our second or back-up indicator for the same is showing the same.
However, this is the one leading indicator that has not been wrong yet, 10 year yields...
Here we see a long term view of them, to the far left they fell on the first initial mention of ending QE when the F_O_M_C was very hawkish last year and had said they envisioned it would be wrapped up before the end of 2013, which sent the bond market in to a tail-spin and rates dropped so fast it scared the F_E_D in to not talking about a QE taper for another 4 meetings.
It's the bigger, more recent signal that is really telling us something.
Here we have 10-year rates vs the SPX (green), note that at the February rally/short squeeze
"A" yields fail to make a higher high as they had been doing at "B" which is the 3 month range in the SPX that we expected to see a head fake move above before the market would turn down. At "C" we got that move above and the signals to tell us it has been a head fake move, but just as if not more importantly, look how 10 year yields diverge even worse.
Just for some perspective...
Here we have the SPX (green) vs 10-year yields as they make a small divergence at "A" and send the SPX on a correction down in late March 2007. At "B" we have a higher high in both as we should, but at "C" we have another divergence in yields sending the SPX down again, at "D" yields fail to make a higher high which
happens to be the very top of the bull market, everything after that was leading to the 2009 lows. The point is, 10-year yields have called several market tops as well as the 2009 bottom and have not given a false signal yet.
Now, take a look once again at the SPX at the 2007 top above vs 10-year rates and...
The SPX and 10-year rates
right now, I'd say the divergence is every bit as bad if not worse and the 2007 top did not end well.
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