Credit, Credit, Credit

I already mentioned today how credit has been the key element missing from the equation and I'm sure you recall me saying that in my view, credit was the most important asset right now, specifically HYG as it is used to support the market. Yesterday I saw a little break in credit, today I saw a nasty break in credit, but for those wondering if this is smart money moving out en-masse, they already did that.

Let me show you..

 This 60 min chart of HYG vs the SPX (green) shows when credit moved out of the market back in May, credit hasn't traded at that level since then, this in itself is one of the largest dislocations I've ever seen in credit vs stocks and fits with the amplitude of some of the very nasty indications in the market.


When we look at HYG 1 min chart like this vs the SPX, we are zooming in, it doesn't give you the sense of how dislocated credit actually already is. However, as an arbitrage asset, it has been used to help move the market along, smart money left the building, I know I already posted this BOFA chart, but here it is again, Institutional sellers vs retail buyers...

 The Pros have been moving out since about December of last year, July is particularly strong, but if Retail wants to buy, why wouldn't the pros sell short to them?

Without institutional money flowing in to the market to drive it higher, other ways have to be found, HYG, VXX & TLT are one way through arbitrage, currencies like USD/JPY which moved the market overnight and then struggled today are another...

I showed this to you earlier (USD/JPY vs ES), but here's a lazy man's way...

 The SPY is green, the USD is orange, note the near exact movement...

The other half of the pair is the Yen, so here's FXY with the SPY inverted...

And they move nearly perfectly together, it's this risk currency pair that was used to ramp the market overnight, not demand. If there was demand left (recall the sentiment update from retail, "I'm all in") then we'd see a huge move through $1700 on volume, but something scared credit out of the market even in its limited presence, apparently it was the F_O_M_C.

 This is a longer term view of High Yielding Junk Credit, also left the game in May.

This is HY Credit intraday, it has no willingness to follow the SPX higher at all.

I have to get my charts to align from the start of a new day, but until I can, this is a good way to show what HYG, Investment Grade and HY Credit did today vs. ES.

Investment Grade did the best, HYG, the most liquid, did the worst and this is really a first for quite some time, probably since May.

While we are looking at longer term indications and talking about sentiment, look at pro sentiment vs the SPX...

Much smaller divergences have sent the market down before, like the start of the divergence in March alone, this is huge and like the pros trading credit, FCT hasn't traded back toward the May area either.

I know I already pointed out the VIX Futures which are a sign traders are reaching for protection as they are bid up, these typically trade almost exactly opposite the SPX in green, not today though and I think this is one of the few areas in the market where you can see real supply/demand dynamics other than a short squeeze. Traders were worried today (not retail) and grabbing protection.

As far as a trade that I think may be coming up very soon, maybe tomorrow, Transports. I know what you must be thinking, "Short transports?", but give me a second.

 I drew this red trendline in a few weeks ago, I haven't touched it and the reason was, I was looking for a move above that trendline that could create a bull trap, just moving above doesn't make a bull trap, but...

 When the 4 hour chart looks this bad, you have a pretty good idea that any strong price move is going to see distribution and thus create a bull trap.

This is IYT intraday, there was early confirmation and then... So I'll be looking at IYT very closely tomorrow as it looks like it's in a near perfect area.

Really though, I'd just be filling up white space here to tell you there was anything more significant about today than the action in credit, I really can't overstate how important it is as it takes the legs right out from under the market and implies a great deal of fear even in the limited size of the current positions.