What High Yield credit is Screaming

I've talked a lot recently about the sharp demise in High Yield Corporate Credit. Without going in to a long history go why this particular risk on , institutional asset is so important, I'll just try to give you a brief explanation.

Institutional money , smart money, whatever you want to call them trade credit, this is not typically an asset that retail traders would trade and most haven't even heard of it or have any idea why its important. Before the financial crisis, organizations could go to banks and borrow a wide basket of credit products and trade them, but in the Financial crisis many banks sold off their credit exposure making it difficult to put together a diversified, but more importantly LIQUID way to trade credit. Thus the creation of a diversified HY Corp. credit asset that is an easy, liquid way to trade credit, HYG is one of the biggies, although there are others.

Typically you have 2 types of credit classes , broadly speaking, the safe haven Investment Grade Credit which might be considered similar to Treasuries when traders are concerned about the market , they rotate out of stocks and in to the "Flight to safety" trade of treasuries, that's not so much the situation presently for unique reasons to this particular market (much of it having to do with liquidity of treasuries as the F_E_D soaked up a ton of supply during QE and the carry trade). The other type would be the "Risk On" High Yield Credit, more akin to a momentum stock.

There are a few services out there such as Capital Context that make their models using High Yield Credit as it is that important. For our own part, it's one of our most important leading indicators and has been excellent at telling us when it looks like they are getting ready to push the market higher and when they are running for cover.

I mentioned earlier that Credit has taken a sharp turn for the worse vs the SPX. If all things were equal in a healthy market , theoretically HY Credit and the averages would move in similar fashion so like Dow theory in a way, the confirmation or non-confirmation of Industrials vs. Transports which have fallen apart as you can see below...

 Dow Industrials (Dow-30) in green vs. Dow Transports (Dow-20) in blue and below a custom indicator I created so you can see the difference in performance as Transports use to be a momentum group and outperformed the Industrials to the left, but have fallen out of bed completely and are now badly laying (below the zero line on the histogram).

Looking at HY Credit vs. the SPX/market can also tell us a lot and is a lot less dated that Dow Theory above.

I often say that the first lever the invisible hand of market manipulation will pull to ramp the market is High Yield corp. Credit and we'll often see that in 3C before we see the price move in HYG. Below are some charts of HYG through various 3C timeframes, remember the shorter term ones are the weakest, but most likely to occur first and the longer term ones show the longer underlying history/trend of whether they have been accumulated or distributed.

The 1 min HYG chart has a small positive divergence, quite similar to the one in the SPY... Or rather I should say the one that was building earlier in the SPY since yesterday- there's some question in my mind right now as to its health, but I'll update that again later.

However, I did show a 1-day oversold condition last night and in the last post I covered it again. I also showed some of our watch list possible trades like NFLX are moving as we expected and hoped for an entry, again see the last post.

I'm not sure how the SPX/SPY will close, but as of the last capture, here's the daily chart...

Daily SPY chart. When the SPY tried to break above the flag I showed you and mentioned it needed to hold $212.50 (Yellow Box) to be an upside catalyst to finish the head fake move I had been expecting (the Igloo/Chimney price pattern which a member pointed out this morning is taking shape in JPM). It failed and from these failed breakouts (a form of head fake move), come fairly fast reversals as we saw in the SPY creating a 1-day oversold condition in the market's breadth yesterday- see the "Internals" section of last night's Daily Wrap. Note the bearish candle and the high volume, although it was actual individual groups/sectors and stocks that provided the 1-day oversold condition signal.

Today's candle is a loss of downside momentum with a "fat" star. If volume can close higher or reasonably high, this gives it a decent chance to create an oversold bounce and this "may" get our watch list shorts in to position, although it seems many are not waiting for the market and are doing it themselves.

Back to HY Credit... the point is, this very short term and weak 3C positive 1 min HYG signal would be the kind of thing we'd expect to see if the market were going to try to finally get this bounce underway- a bounce that would fail, but give us the opportunities we have been looking for. Again, I refer you to the NFLX Trade Set-Up not because it is unique, but because it is representative of many of the assets we are looking at and letting the trade come to us.

 Like the SPY, the 2 min HYG chart has no such positive divergence. It's very weak to see a 1 min chart positive for a day and not have migrated to a stronger timeframe of only 2 mins. In other words, any bounce condition in the market or HYG as a lever to help, is very weak, which is not to say it won't or can't bounce, indeed that's what the signals are pointing at, just not a bounce that will hold which is exactly what we want to see for our new position entries.

 The 3 min HYG chart is in line or confirming the downside price trend.

 As is the 10 min HYG chart, although this is a much stronger time frame with stronger underlying flows.

 And HYG's 15 min chart at a new leading negative 3C low and price low for the chart.

Take a look at the same chart without any distractions on it...

 HYG 15 min has been in horrible shape.

The HYG 30 min which has also been in horrible shape with divergences just pointing to a move lower which has taken place and will continue to move lower over weeks and months ahead.

 Finally the strongest 3C chart of HYG, the daily. Look at how bad the 3C signals turn right around the larger red box and note 3C at a new leading negative low on the strongest daily chart signal.

Again, the same daily chart with no distractions on it.

You may have noticed we often work from reverse, long term to shorter term as the longer term charts represent the trend of underlying accumulation or distribution and the shorter term charts represent the timing of when the long term chart's projections of a break are ready to take place.

Comparing HYG (blue) to SPX (green), the only real important thing to the market is NOT the 3C signal, ONLY WE SEE THAT, it's HY Credits position vs the market. Like Dow Theory with Industrials and transports, is smart money confirming what the market is showing or is it diverging?

 Again, starting from the long end or STRATEGIC charts, this daily HYG vs SPX shows that it was in line for a while at the green arrow and then HYG went on to make a series of lower highs (red) and lower lows (yellow) and is in a primary downtrend, FAR from confirming the market. I expect HYG to make a new lower low next.

 As for the medium term charts, You can see how HYG is used to ramp the market as the SPX follows it nearly in lock-step , but recently HYG has fallen off and is diverging with the market. This is more of a tactical basis.

And much shorter term you se the deterioration in HYG's trend long before it completely dislocates from the SPX. Again, the long term strategic charts are pointing to the highest probability resolution and the shorter term tactical charts are pointing toward the best position timing.

As it stands RIGHT NOW, it looks like HYG will give brief support to the market as long as it can which shouldn't be long at all, maybe enough to get off a small, normal counter trend bounce or correction on the 1-day oversold condition in place. However after that, everything is screaming DOWN for the market.

We want to use ANY price strength we can get to sell long positions and/or enter short positions if you haven't already or add to them.

High Yield Credit is telling us a lot if you listen. Remember this post in subsequent market updates.