Pieces are coming together

The one question that had been bothering me with all other evidence stacked up in a bearish direction was credit. While ETFs representing underlying credit do have a T+3 settlement rule, that rule is for securities/equities/stocks, so HYG for example would be bound by the "Trade Plus 3 Days" settlement rule, however it is tracking real credit, I have not seen any SEC regulations that Credit transactions are bound by the T+3 settlement rule for equities.

The first bit of evidence that HYG and other High Yield Credit wasn't as strong as price appeared was in the form of 3C charts. Last night I gave you further evidence collected that Hedge Funds are moving out of "Risk On" positions which is exactly what High Yield Credit is as opposed to Investment Grade (IG).

The only reason that the T+3 rule even comes in to the equation is because of what happened in credit today and today's date, Friday was the last day of the month, important for fund performance and window dressing, but apparently there appear to be different standards for settlement in Credit vs Stocks as evidenced by the price action in High Yield Credit on the first trading day of the new month.

So lets take a look at the Risk Asset Layout now.

First the evidence that has been very clear.

 Yields haven't failed us yet, the SPX (green) tends to follow yields like a magnet once they diverge like this.

 A reversal and timing is one thing, the amplitude or seriousness of it is another, look at Yields compared to the former highs in the SPX, this speaks to the seriousness of the situation, not just timing of a reversal.

 The $AUD intraday isn't interested at all in following the SPX.

 Longer term it is another that hasn't failed us when it gives a signal thus far and the signal just got a whole lot worse.

 Take a look at the last market reversal and $AUD divergence and this one, again you get that feeling of a bear market counter trend rally rather than what the price trend really represents, but price is deceptive.

 Commodities had also recently been moving on a legacy arbitrage basis, I'm not sure about their settlement schedule either, they are not equities, today they are very much out of sync with the SPX.

 Here you can see them following the EUR/uSD legacy arbitrage model, that seems to be breaking down as I believe the Euro will as well shortly with record low short interest for the year.

 High Yield Credit is falling with the SPX, not a very liquid market so not my favorite, but it's a start.

 High Yield Corp. is underperforming the SPX worse than the chart shows, this is a very liquid market.

 Here's a better view of High Yield Corporate vs the SPX, finally diverging, but why so long?

 We have seen HY Corp. Credit pull a head fake move out of a 3 month downtrend channel, after it popped above the channel, it fell fast, this appears to be a larger head fake move as you saw in last night's post, hedge funds have been moving out the last month, remember what we see preceding 80% or more of reversals, it's right there in yellow and the fact HYG breaks down after the month of August closes is interesting as well.

 Remember I checked out the internals of HYG as it didn't make sense? Here's the divergence on the 4 hour chart at almost the exact same relative price level, much less flow in HYG now.

And closer, the 5 min chart breaking down badly as HYG made that slight new breakout high Friday that failed today.

 Junk Credit isn't any better than HY Corp. Credit. These were the missing pieces, but apparently the evidence for them staging a false move is there.

Sector rotation today doesn't look good.

Only financials are making any showing, Tech is trying, but Energy, the high momentum/Beta Materials stocks are down and out, Energy, Discretionary and Industrials look horrible and all the defensive sectors are stronger than ever and you saw how strong they were last night longer term.