The Death of HYG Credit

We've already seen High Yield Credit and even investment grade credit take the plunge and credit has historically been one of the best leading indicators because that's where the smartest money is to be found, thus the mantra, "Credit leads and equities follow".

However the very liquid HYG (High Yield Corporate Credit) is one of 3 assets ties to market manipulation via arbitrage and algorithmic trading. 

You've no doubt heard of the SPY Arbitrage which is a way to move the market and create artificial demand, the three assets that are tied to an Arbitrage model are VXX. If VIX short term futures move down, computers (which do most of the trading these days) look at that as a lack of fear and money rotating from protection to risk assets and takes that as a buy signal. TLT (20+ year Bond Fund) is the second, it reacts in similar fashion to VXX because traditionally bonds have been a "Flight to Safety" trade, so if TLT drops the computers see that as money coming out of the safe harbor of bonds and rotating to risk assets (stocks or HY Credit) and Finally HYG (High Yield Corporate Credit).

Before the 2007 2008 2009 housing bubble and subsequent bank failures, Institutional money regularly used High Yield Credit as a risk asset or Investment Grade Credit as a flight to safety. The same way you and I borrow shares from our broker when we sell short and return them when we buy to cover, Institutional money went to banks and borrowed credit, but they'd diversify a basket of different credit products to create a position. After the banking crisis, banks moved quickly to scrub their balance sheets clean of credit and it became very difficult for Institutional investors to borrow credit in the size they needed as well as the diversification they needed to create a basket, then came the rise of products like HYG which is a very liquid, diversified High Yield Corp. Credit derivative that trades like a stock and instead of creating baskets, HYG was used instead. Thus, when computers see HYG moving up they assume  institutional money is bullish and the algos buy risk assets which is synonymous with stocks or futures, thus it became fairly easy to manipulate the market by creating the illusion risk was on (by VXX and / or TLT falling and HYG rising) or risk off (with TLT and VXX rising and HYG falling).

Something happened to HYG around May 22nd when we had that Key 1-day reversal that I said and still believe marked a significant change in the tone of the market and when we have the benefit of enough hindsight, I think 5/22/2013 will be understood for what it was, in any case, although this is not a fair job at scaling HYG vs the SPY, you can see Credit faltered on large volume at 5/22 and never quite recovered.

 HYG (green) vs SPY (red) and 5/22 at the red arrows, HYG credit crashed and never recovered.

On a $100 scale from the far left, HYG was moving up, then came 5/22 and it fell below $95 (on a $100 scale) and still has not recouped even the initial scale much less the highs.

However HYG has been used to some effect to manipulate the market in the absence of real buyers as can be seen in breadth charts in which 2013 sees the Percentage of NYSE Stocks Above their 200-day moving average over at 82% of all NYSE stocks at January 2013 to a low 44% in June and far from recovered even though the SPX has gained significantly since then to a current percentage of only 56%.

As for the 3C charts for HYG, this is why I was trying to open Put positions in HYG today, but they didn't go through.

 With significant divergences they'll almost always start on short term charts like this and then if strong enough, migrate out to longer term (the longer term chart, the stronger the signal) and then when they near the end of the distribution or accumulation cycle, the short term charts will once again go divergent as a timing marker for the actual turn in the major divegrence, that entire process is now nearly complete in HYG which is significant not only from an institutional risk perspective, although they really stopped taking real risk (looking for gains) toward the end of May, but even more so right now from a manipulation standpoint. To move HYG some kind of buying has to take place, even if it's not serious amounts, it would seem even the smaller buying used to manipulate assets is now considered too big of a risk and it's unlikely HYG will be effective in the near future for manipulation of the market or creating false risk appetite signals.

This is the intraday 1 min trend turning negative.

The 2 min intraday trend is solidly negative

As is the 3 min intraday trend in a large leading negative divegrence, in other words, in the red box we are seeing heavier than normal distribution.

I thought we'd see an intraday bounce today based on a flat trading range in HYG today and a positive 3 min intraday divergence, this wouldn't be a big bounce, but maybe a "Bang the close" type move, but it seems as the day went on that divergence failed.

The much more serious intermediate charts like 10 min show distribution in the same area as the intraday trend charts.

This 30 min chart doesn't have the detail of shorter charts, but makes the trends very clear and again, strong distribution as we have a leading negative divegrence (thus my wanting to open a Put position here as I feel the equity short alone doesn't have enough beta).

 And here is a cycle on the 60 min chart from stage 4 decline at the far left to stage 1 accumulation, stage 2 mark-up, stage 3 distribution that is leading negative and HYG is starting to roll in to stage 4 decline.

The Trend Channel (60 min) shows HYG maintaining the Trend, there's one close call that almost stopped out at the yellow arrow, but from the red arrow forward, about 8 bars, the Trend Channel is broken and has issued a stop out for this HYG trend. The natural progression from stage 3 distribution which starts while the asset is still moving up is to a flat or rounding-type top as it rolls in to decline or stage 4 which in Dow Theory on a Primary trend basis would be called a bear market.

In any case, while certain assets are still fuzzy, choppy and not giving great confirmation (which rarely lasts more than a day or two), HYG is giving a very clear signal and for this market that has survived on gimmicks like carry trades, Arbitrage and Weighted Index component buying like moving the Q's via AAPL buying AAPL or Carl ICaahn Tweets like today as AAPL represents somewhere around 20% of the NASDAQ 100's weight, this is one significant trick in their book that looks like will no longer be effective at the least, looking with a different perspective, you might even say that the minimal long commitments here are being abandoned as they are more afraid of getting caught long HYG.