Leading Indicators

Considering the time I have left (I need to leave around 3 pm to pick up my wife or "Vife" in Hungarian), I'm not going to post too many charts, but I do like what I see in Leading Indicators, HIO is one of my newer ones, "High Income Opportunity Fund"and it's looking good. Currencies as shown this morning are in favorable position for our longer term positioning.

As for HYG (High Yield corporate Credit), I'm convinced the very recent uptick there (still in a major dislocation with the SPX) is one of two things, a short squeeze and a very liquid form of High Yield Credit that is exceptionally cheap.

It's really the divergence between Credit and the SPX that is the signal, but we can use 3C to see when credit is going to turn before we even get the price signal we use.

High Yield Credit is what we use for Leading Indicators, although yo could use IG if you could find a liquid enough form. A move to IG would be like a flight to safety trade and be bearish for the market if the SPX is rising and Investment Grade Credit is rising, this is why they are called "Leading Indicators", we don't want to chase anything, we want to get in at the top where the risk is lowest and the price is the best (for shorts-bottom for longs) and picking tops and bottoms use to be  fool's game and still is for many, but we have some tools that give us an edge.

As for HY Corp.

 At "A" that's the summer 2011 market crash of about 20%, you may recall we nearly doubled the model portfolio over the next 2 months trading 2-3 day moves with leveraged ETFs, then we predicted a new low and a strong rally after, the new low was October and HYG led the market there too as the SPX hit it on October 4th. Then the 2012 May 1st decline in which all 9 of our core shorts built over the preceding 2 months all went to double digit gains as we correctly predicted a head fake low and a move to the upside on June 4th. The current HYG negative divergence is worse than the 2011 summer divergence, price is higher, that makes the divergence worse.

As for the break down, that was the first red flag for the SPX, we saw a recent bounce in HYG and I told you what I think it was, that is seeing distribution too now so we are on track.

One final point with the 5 hour (and thank you everyone for the emails on getting that timeframe on TOS)...

The thing about the market is it is "Fractal", meaning the patterns and behavior you see on a 5 hour chart you will also see on a 5 day or 5 min chart.

This is an excellent example of what I call the "Pendulum Effect", although rather small compared to what I think we will get when trend 2 (decline) kicks in, it shows the overshoot to the upside, breaking out of the Bollinger Bands, a clear warning and then as usual, the overshoot to the downside. This is why I say, "When coming up with a target, multiply whatever you think is reasonable by 2-3x".

So I do think we will see a move back toward the channel or median of the Bollinger Bands, the market wants to keep as many people wrong as it can at any one time.