Quick Market Update and High Yield Corp Credit (HYG)

Thus far the intraday charts for the averages are fairly well skewed to the bearish side, if there's an exception or at least an average with better 3C relative strength, it would be the IWM.

I'll update the market as soon as I get some cleaner signals in a couple of groups I'm looking at and as soon as I make sure we're not missing an opportunity here.

Yesterday I covered the manipulation of the market via algos following Arbitrage signals, a lot of that had to do with HYG (High Yield Corporate Bonds) as one of three assets that are modeled for the arbitrage opportunity.

I've said numerous times that this is usually a short term event and one of the reasons it is is because it takes money to move HYG, it may be a bargain for the bang they get in the averages, but if there's more willingness to sell in to that price strength or short in to it, then it starts getting a lot more expensive and this is partly why we've seen the levers of manipulation rotate so frequently, HYG is a practical lever as long as the VIX is low, with the VIX or VXX moving up, HYG no longer becomes a practical lever.

I was asked by a member why I said short term manipulation as it seems like they've been using HYG all year, that's sort of paraphrasing. The actual events are pretty short term, there are many through the year, but HYG is far, far from being in a healthy state and that is important because the credit markets are a lot better informed, thus the moniker, "Credit leads, stocks follow". I won't go through the mechanism of manipulation again as that was covered last night in the post linked above, but I do want to show you that HYG HAS NOT been used ALL year, just in places where they really need the help to get the market moving as the market doesn't have much more demand left even with record margin debt and record bullishness among retail.

As an aside, tonight I'm going to try to finish up a post on "Dark Pools", the misconceptions and how we actually benefit from them by not playing the game against them, but with them.

HYG...

 We started using HYG as a Leading Indicator and in multiple timeframes, this divergence in 2011 was very clear at the time, although by the standards of the size of the divergences today, this doesn't look like anything, at the time though it was a bright red flag telling us a nice move to the downside was coming.

HYG white vs SPX candlesticks.

Again in 2012 HYG divergences signalled another turning point for the market.

Now look at the size of the divegrence through 2013 compared to the last one in 2012 (chart above) to the far left of the chart at the red arrow, this is one of the divergences that is so stunning in its magnitude that it portends very bad things for this market, in my view, likely a secular bear in equities the likes of which we have never seen.

HYG has ZERO relative performance vs the SPX, In May Credit broke off badly from the market when we had the May 22 1-day key reversal.

Here we look on a closer basis, in green arrows I've highlighted where HYG has been used to help the market and where the market was at the time, as you can see, they are short term bursts that are not sustainable otherwise HYG would be tracking the SPX on this chart and the chart above this.

This shows the distribution that is solid through HYG.

This 5 min chart shows a few areas of HYG being used to help move the market, but a 5 min divergence is the smallest of institutional divergences and the distribution is always much heavier than accumulation.

Quite honestly, I'm shocked at the size of the divergence in HYG and I can only imagine what it's telling us about the future.