I've long relied on Leading Indicators fro both short term and big picture market action.
However perhaps one of the most important leading indicators we should be paying attention to right now is Greece.
For those old enough to remember, the "All Star " team including two Nobel Prize laureates for economics including Myron Scholes of the options pricing "Black and Scholes" model and the head bond trader from Solomon (
as well as several others all collectively dubbed, "The Smartest Guys in the Room") made up Long Term Capital Management who were returning annualized returns
(less fees) of +21%, +43% and +41% in their first 3 years. By September 1998 LTCM Equity dropped from $2.3 Billion at the start of September to $400 million by September 25th with liabilities of over $100 BILLION adding up to an effective leverage ratio of more than 250:1.
Shortly thereafter Warren Buffet leading a conglomerate of investors including Goldman Sachs, Berkshire Hathaway and AIG offered to buyout LTCM's principles for $250 million and they'd inject $3.7 bn. For a firm that started the year worth $4.2 billion, the $$250 million offer seemed shockingly low in addition,
Buffet gave them 60 minutes to decide whether to accept the deal which they did not. LTCM had to be bailed out as it threatened to collapse the Financial Industry with unknown effects across the globe, similar to Lehman in a way.
So perhaps the IMF and Greek drama today with the IMF saying that the differences with Greece were so vast and so little progress had been made
, the entire negotiating team representing the IMF was recalled from Brussels today where negations were taking place.
No one knows just how bad the fallout across the European financial sector could be and where those nasty little surprises that even the F_E_D said they had not foreseen in the 2007 Financial Crisis, might lead?
As for what we can know right now from our own Leading Indicators...
The SPX:RUT Ratio (
red) vs . the SPX (
green) showing the positive divergence at the "V" bottom lows in the indicator and the dislocation from the market both yesterday and today.
Our VIX term Structure (
Inversion) indicator which is set up for
"Buy" signals, is far from a buy signal...
The indicator (
bottom window with signals painted on the SPX's price candles in white) is not proving a negative, it's just not giving a signal that I'd be concerned about in the area that could lead to a more lasting bounce as the past signals have,
There's no level I use specifically for a sell signal, but you can see we are pretty far from the area which a buy signal would be generated.
This is a close-up of HYG (
and its lever/manipulation support often used to boost the market when it can't otherwise do it on its own) and again today, despite some afternoon improvement, has led negative vs the SPX.
The 1 min HYG v. SPX chart in context looks like this showing HYG's leading the SPX lower at the red area, then some flattening out of HYG's price at the yellow arrow, but instead of the market building a stronger "W" bottom as proposed earlier in the week, it took off on a less table "V" shaped base and this "may" be the reason HYG never led the SPX to the upside, it didn't have the extra day it would have needed.
In any case, High Yield Corporate Credit's divergence vs. the SPX, even when having been activated, is notable.
You've all likely seen the long term trend in HYG which is a primary downtrend, so I won't post that again, but to give you some way to put the leading indicator's dislocation from the market in to perspective...
This is by far the worst negative dislocation I've seen in HYG vs the SPX and that includes the period in September 2014 just before the market collapsed to the October lows.
As I posted about a week ago, you can't consider any analysis in a bubble that doesn't include HY Credit's standing, What High Yield credit is Screaming
Our Professional Sentiment Indicators have fallen off the map and once again,
there's no appetite to chase risk here.
To put the indicator in to perspective, once again despite having given previous positive and negative signals, this one stands out as "Screaming" or jumping off the chart.
These are the kinds of signals Leading Indicators were made to highlight as they tell us a lot about the market and the most likely "path of least resistance" or in this case, the path of least "support".
Our secondary Pro. Sentiment Leading Indicator is confirming both near term with pro's not willing to chase risk whatsoever here and...
The larger picture with a clear dislocation and evidence of what happened at the last dislocation between the two assets.
The VXX vs the SPX (
in green with prices inverted to show the normal correlation/relative performance between the two) .
It is clear that the last 2-days have seen the VIX short term Futures absolutely slammed vs. the SPX giving the market support.
While less blatant, the VIX (
spot) also shows a
Whack-a-VIX which is used to support or ramp equities as a form of market manipulation.
I invert the SPX prices as the VIX should move opposite the SPX/market and inverting one or the other allows you to see what should be close to a 1.0 correlation and where there is evidence of relative performance differences. In this case and especially VXX, the difference is quite extreme, but they wouldn't be doing that or using HYG if the market had the strength on its own to make even such a limited short squeeze correction.
Yields use to be one of my favorite leading indicators as they move opposite bond prices and thus tend to pull equity prices toward them like a magnet. Yields as a leading indicator became less reliable as the carry trade unwind started in the $USD and the first and main asset bought with carry proceeds which would have to be sold upon a carry unwind as shown earlier today, in TLT / 30 Year Treasury Futures Broad Update
To see the correlation between $USD sponsored carry activity and bond prices as well as how bond prices react during carry trade unwind, see the last two charts of today's TLT / 30 Year Treasury Futures Broad Update post at the very bottom. Not only are the price trends amazingly correlated, but even the 3C charts.
We have long used commodities (
Brown) as a risk asset to act as a leading indicator. At times they don't work as well, for instance when we realized that commodity weakness was the first hint that China was having economic trouble at least 3 months before it became mainstream, common knowledge. In other scenarios, commodities have been pressured in one way or another by the F_E_D and QE, however with the $USD recently coming off a strong counter trend correction, commodities have been in an area in which they can work as a leading indicator for the time. The positive and negative Leading divergences in commodities vs the SPX only confirms the pattern seen above among leading indicators.
And High Yield Credit, but not there extremely liquid HYG which is often used for short term market manipulation. Because it is not used for alternative purposes and races more honestly, HY Credit above shows a very clear leading negative divergence at the market's May Head Fake / False Breakout highs as well as right now as it hits a new cycle low while the SPX bounces for a second day.
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