Leading Indicators

There's no real smoking gun, there is some deterioration in assets I'd expect to see it in and as I mentioned this morning I believe, "keep an eye on treasuries and flight to safety trades" such as XLU which is flat, however we do have some interesting Treasury/rate action.

We did expect HYG to move north as a short term market lever and possibly TLT and VXX down to activate the SPY Arbitrage lever, but thus far today other than HYG, TLT is not buying nor are the 5 or 10 year treasuries. There are signs of High Yield credit also not buying and our professional sentiment indicators are weak at best, definitely not leading to the upside.

Lets take a look at a few...

 CONTEXT's ES model is showing about a 16 point differential between ES and the model with the model about 16 points lower, I have a feeling a lot of this has to do with treasuries today.

We expected HYG (High Yield Corporate Credit) to be higher today as a ramping lever for market support, however it has seen some underperformance vs the SPX above (green).

This is the 5 min HYG chart, I posted this yesterday and expected HYG to move up, this was part of my analysis that went in to the decision to take off SRTY at a gain yesterday and replace it with URTY for a short term IWM bounce SRTY and riding out any bounce.

 On the HYG move up today, we are already seeing signs of distribution and of course this is going to keep moving longer term in the direction of highest probabilities as  seen below on a 4 hour (strong underlying trade/flow) chart.

This leading negative 4 hour divegrence in HYG is going to drop credit even lower than it already is as you may recall the massive dislocation from the SPX ever since window dressing finished as of July 1st in which we see indicators, breadth, assets, etc. everywhere deteriorating massively as of July 1, this is why window dressing is called the "Art of looking smart", most of those positions added the last week or so of Q2 seem to have been sold July 1st as we expected, but I didn't expect such clear demarcation right at July 1st through numerous assets and indicators. The other date of course is June 18, the last F_O_M_C meeting.

 High Yield Credit which has no link to manipulating the market higher as HYG does , as you can see it is not buying as equities are, given the choice between which to follow, I'll take credit every time.

 This is TLT (20+ year treasuries) intraday vs the SPX, I inverted the SPX prices (green) so you can see where TLT "should" be (normally right in line with the SPX), there's significant outperformance in TLT today which is something, as mentioned above I had thought we should be on the lookout for today.

This is across the curve as well...

 Here I left the SPX intraday normal (not inverted) and used the 10-year rates, remember if rates are down, the treasury/bond is up, in other words it looks like a flight to safety trade, but there are more complicated issues with bank collateral as the F_E_D has absorbed most collateral, so it's not as simple as it use to be.

Remember April 30th (month end) setting the second highest usage of the F_E_D reverse repo (1-day) for month end window dressing and then at the end of Q2 on the last day the facility set an all time new record high for usage, it looks like banks (the 94 that participated) are about 1/3rd of a trillion short collateral so they use the 1-day reverse repo on the last day of the quarter, the next day it goes back to the F_E_D so the banks can fool clients and regulators which is ironic considering who they got the assets from and who their regulator is, they are one in the same.

5 year rates have fallen as well meaning 5 year treasuries are up on the day. This typically acts as a magnet and pulls equities toward rates.

As far as carry trades, just taking a quick look, it looks like the beat up EUR/JPY will bounce, but I don't know that it will have any meaningful impact.

 intraday positive in EUR/JPY

The 15 min EUR futures do have a positive divegrence for a bounce, but I think that is all, go to a longer chart...

And the 60 min Euro is in line so I don't expect this to be much more than a short term bounce and I don't really expect it to be much of a market lever.