Credit/Equity

As you know, I recently introduced the Credit-Risk basket indicators vs the SPX, the idea being Credit as a much larger market, leads equities and it has been showing dangerous dislocations, that are actually quite large.

That taken with 3C and even MoneyStream readings point to the rally, particularly since 12-20-2011 as being very high probability bear market rally. I have described the conditions of a bear market rally before, but the main conditions tend to be a very sharp rally after a significant top is broken (the 2011 top), they tend to be on weak breadth, low volume and they sucker in investors and as such, bullish sentiment is very high. However they end in an even more dramatic way, with sharp, water-fall like declines. Many investors being bullish will continue to buy, thinking it's an oversold pullback.

In one neat, organized chart which a member sent, you can see the divergence between credit markets (which should rally with equities in a true rally) and how they have diverged from equities, the same thing we are seeing thus far today in High Yield Corporate Credit...

High yield is significantly less enthusiastic then the SPX.

However this chart lays out the big picture...

Not only does Credit call out the 2007 top (highlighted in a light shade), credit also calls the March 2009 bottom while equities continue to drop. While it's not shaded, credit also calls the 2011 top and the subsequent late July decline. Highlighted, you can also see it is currently diverging in the same area that appears to be a sharp bear market rally.