One of the more notable changes in character this week was actually hinted at last Thursday in an overnight session which I wrote about last week as an oddity, turns out it was one of those "Changes in character" that leads to a change in trend, in this case a long established trend/correlation.
Stocks had their worst week since July, the S&P missed 2000 again despite the reemergence of 1 share orders this afternoon and was the worst performer on the week of the major averages.
This of course is right on line with the 3C signals for the August cycle...
While the Dow...
You might think there would be some rotation in to bonds considering equity weakness, however...
Treasury yields had a horrible week as USD/JPY lost all correlation with Index Futures (a red flag) and rather took up with treasury yields, all significantly higher on the week.
The $USD, which we have been watching for a return to the historical legacy arbitrage correlation saw another weekly gain of +.05% on weakness in JPY, CAD and AUD. It would seem the $USD legacy correlation is returning amidst all kinds of other undercurrents such as the GBP strength/weakness on the Scottish referendum for independence next week, still the higher dollar saw commodities/$USD denominated assets lower including significant lows in gold, silver, copper and oil which regained some lost ground.
This section is to show that not only does HY Credit's charts lead the market, but the actual flows in and out of High Yield Credit have a telling impact on the market. First from July 25th when the market looked like this...
"High Yield ETFs and funds have seen huge outflows the last month, THIS WEEK SAW THE LARGEST OUTFLOW FROM HIGH YIELD FUNDS IN MORE THAN A YEAR! Much of the flow has gone to low yielding, defensive Investment Grade Credit."
The following decline shaved -3.94% from the SPX , -4.49%from the Dow-30 and 4-8% from the Russell 2000, depending on when you account for the flow of HY Credit exiting the market.
From Monday, August 11th (the day the August cycle moved from stage 1 base to stage 2 mark-up, Intraday Update
"One of the reasons I think the upside sub-intermediate term bounce from the last week's base is still on track (other than the divergences) is that HYG is still leading the SPX higher (short term manipulation lever)- remember that small inflow of money in to HY credit last week? I suspected it was for a short term bounce off our week long base."
If we look at the relationship between HYG and the SPX (as we have more than a few times), we see exactly what I'm talking about above, HYG is leading the market, not only at the base, but through stage 2, followed by stage 3 and has already entered stage 4, while the market with it's downtrend this week may or may not have entered stage 4 decline (I personally don't think it has just yet), there's no denying that HYG credit which we have used for this very purpose, as a Leading Indicator, for years, is leading the market.
The white arrow above HYG shows it is still leading the SPX, the orange arrow above HYG shows where HYG lead the market in entering lateral stage 3 (top) and the red arrow shows where HYG led the market again entering stage 4 decline. The important thing is HYG LEADS the market.
I have included these same stages for the SPX wrapped around the dates at the bottom, stage 1 accumulation/base from 8/2 to 8/8 and stage 2 mark up the next trading day on 8-11. The SPX moves to lateral stage 3 top around 8/26 through present as it is marked in orange, although this week's clear downtrend could be looked at as the start of stage 4 decline as I posted in last Friday's The Week Ahead...
"If I had to make a call, I'd say more of the same, more lateral chop which in the cycle is stage 3 top/reversal process... I feel pretty strongly the market will enter stage 4 decline sometime next week "
The above forward week forecast was probably about as close to right as we could have possibly been at the time. I don't think any one would argue that this week has been in essence, "More of the same lateral/sideways chop with the SPX-.73% on the week, the NASDAQ 100 -0.50% on the week , the Dow-30 -0.82% on the week and the Russell 2000 down -.81% on the week (if counted until yesterday, the Russell 2k is up +0.19% on the week (just to illustrate the chop).
As for the stage 4 decline... "I feel pretty strongly the market will enter stage 4 decline sometime next week "
Looking at this trend of the SPX for the week vs HYG, it's not that much of a stretch to say the market has transitioned from lateral , choppy, stage 3 top to the stage 4 decline phase with a series of lower highs and lower lows.
The SPX is in green, HYG is in blue. HYG is already well in to stage 4 and looking at the trend for the week with the SPX's lower highs and lower lows, I think it's not that much of a stretch to say that we have transitioned to stage 4 decline. However, the point I'm trying to get at here is the role High Yield Credit plays as a leading indicator. Look at the SPX's clear down trend and HYG which has turned lateral for the last 3 days as it has built a positive divegrence, you can also see the SPX has essentially flattened out as it barely made a mower low today.
From Thursday August 14th's Daily Wrap
" As we moved toward a base/bounce I noticed some inflow (small) in to HY credit which I figured was for a bounce and I noticed SKEW dropped below the elevated zone which I thought the same of"
From August 18th's Daily Wrap...
"Last week, there was a small inflow of funds ($0.71 bn) in to HY Credit, the measurement period aligns almost perfectly with the start of the bounce which is something I mentioned before as I believe smart money are making small "Piggy-Back" trades just as we like to do with solid bounces with decent signals."
That brings us to where we are currently in the cycle, you have seen already what High Yield corporate Credit has done and what stage it is in and it's leadership character...
According to Lipper Data, for the week ended Sept. 10 US High Yield bond funds saw an outflow of $765.8m , which is the second consecutive week of outflows as the previous week saw an outflow of $198.1m. I think it's pretty clear to see that HY fund flow (much more coming out than what went in in late July/early August, is leading the market and pretty well synced with assets like High Yield Corporate Credit (HYG).
The primary buyer in the market has been corporate buybacks which for at least 2 years have seen record levels of buybacks which allow EPS and share prices to be artificially juiced higher, we know from Q2 data that the "Buyback Party" has now ended, it had to. As was posted here before, HY credit and equities are both arbitrage-able bets on the same capital structure. Simply put, "Credit leads, equities follow", the proof is on the charts above.
As for our HYG positive divegrence and the SPX chart for the week/downtrend, we know the market never makes it easy, but it is possible if you are paying attention.
I'm talking specifically about this chart...
And specifically this chart as the averages don't have the kind of divergences to support a breakout
HYG 3-day 15 min leading positive divegrence. We've seen at least 2 HYG divergences, smaller, get run over already over the course of the last week or so, but this is the strongest of all of them which is why I posted what I did in this afternoon's, The Week Ahead. From my perspective, with the SPX chart having such an obvious channel, the F_O_M_C coming up and the scramble in some of our "Trade-Set-Up" assets to try to make it to their head fake zone seemingly before any serious market downside as we saw in FSLR and SCTY (up +1.62 and +3.84% respectively) in a down market and VERY close to the areas we marked as target areas, this just makes sense. The market rarely makes things easy or predictable.
Among other Leading Indicators, both of our Professional Sentiment Indicators ended the day right in line with the SPX, not a divergence suggesting higher prices in the near term. More importantly, these Leading Indicators have diverged notably from the SPX.
Our sentiment indicators have been in sync, confirming market action from the July decline to the August cycle, but at stage 3, much like our other leading indicator, HY Credit, they have diverged notably from the SPX.
Not surprisingly, HY Credit (other than HYG) was crumbling on the late week decline.
If our leading indication of Yields could be relied upon like it has been so often in the past (this has been a VERY weird week for bonds), then they'd suggest something I already brought up in today's post, The Week Ahead
Yields have been spot on during the August cycle until the last week or so, is HYG's signal enough to suggest this leading indicator might be correct as well? Note the channel mentioned in the SPX...
Also interesting given the Week Ahead, HYG and a few other indications ... There was a Dominant Price/Volume Relationship today which was Close Down/Volume Up, with 18 of the Dow, 64 of the NASDAQ 100, 838 of the R2K and 241 of SPX.
This relationship most often signals a short term oversold or more precisely, a capitulation event with the market often closing green the next day which is quite interesting all things considered.
Adding to this, all 9 S&P sectors closed red today with Utilities performing the worst at -1.79 and Financials the best at -0.09. ALSO, all 9 S&P sectors closed red on the week, with Technology losing the least and Energy losing the most. AGAIN, THIS IS INDICATIVE OF THE SAME SHORT TERM OVERSOLD EVENT WE SAW TUESDAY.
Just to round it out, only 37 of the 239 Morningstar groups closed green, Tuesday this was 17 of 239, very similar and Wednesday we had a green close across the board, the best day of the week for 3 of the 4 major averages. Just to drive the point home even further, the same groups only had 56 of 239 close green on the week. In other words, we not only have the same kind of 1-day oversold event (deeply) that we saw Tuesday, but one of the worst on the week , perhaps worse than the July 31st breadth post in which we suspected a base and bounce based on the horrid breadth readings.
Continuing along the breadth path as I knew from today's intraday breadth that today was going to be bad, we had some of the biggest moves of the week in breadth declines today.
Advance/Decline lines deteriorated badly, most breadth indicators posted the largest losses of the week on top of losses already seen which I have been talking about this week as leaving this market very exposed up here and very hollow or thin.
To illustrate HOW BAD a shape this market is in, here's the "Percentage of NYSE Stocks Above their 200-day Moving Average"...
Breadth indicator green/SPX red. The indicator has made a new low that is BELOW the 8/11 reading, 8/11 is the first day of stage 2 mark-up, so breadth at this level in the SPX is now LOWER/WORSE than it was as the stage 2 rally started!
The "Percentage of NYSE Stocks One Standard Deviation Above their 200-day Moving Average" is nearly at new lows!
Again, indicator green, SPX red. The horrible breadth DURING a DECLINE is the reason I posted the urgent July 31st update expecting a base to form and a bounce because the market was so oversold from a breadth perspective.
I am NOT making the same case now, although this does help the case I made in the The Week Ahead , however after that, I feel like the little boy who says, "I see ghosts", this is exceptional market breadth readings far surpassing the 2007 top.
The "Percentage of NYSE Stocks Above their 40-day Moving Average" lost 11 percentage points today alone which puts the breadth reading at a 66% retracement from the lows that created the August rally!
I can go on and on, but I think this gives the week ahead forecast some legs and it gives our longer term forecast or bigger picture I should say because we are right at our longer term forecast, some serious teeth.
I'd really be ready for next week, unless the F_E_D pulls a printing press out of their pocket and proceeds to print right there, I don't think there's much stopping this (actual momentum, just not visible in price, but it is in 3C and breadth as well as Leading Indicators and a number of other pieces of the puzzle we have put together.
If you got some positions together this week, you should have a great weekend, I feel great about next week.
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