HYG has had an enormous amount of influence on the market. If you follow our posts and Friday afternoon, "Week Ahead " updates, 3C divergences and Leading Indicators have given us a pretty darn accurate call of the week ahead from late July (31st's) deeply oversold BREADTH (I really don't care about oversold indicators as they aren't very reliable) and expected base/bounce which was the August cycle to the forming of the base for the August cycle in which not only 3C positive divergences told us an upside move was coming off the base being constructed, but in other assets, especially HYG which bottomed on 8/1 and led the market higher as opposed to the SPX bottoming or ending its base on 8/8 with a start higher on 8/11. The Week Ahead updates calling for more upside, then a choppy topping range and eventually HYG moving to stage 4 were all telegraphed via either 3C and/or HYG. I've published these charts at least 2 dozen times over the course of the August cycle, but as a quick reminder of the degree of correlation, this is the SPY vs HYG (green and red respectively).
HYG has long been one of our favorite leading indicators because it's one of the most liquid ways for smart money to trade credit since the banks that use to loan credit to institutional firms rid their balance sheets of most credit after the financial crisis, making HYG one of the most diversified and liquid ways for institutional money to trade HY credit which is viewed as "Risk on" sentiment via smart money and as such, HFT's and algos are programmed to follow the signals and buy stocks on HYG gains, sell them on HYG declines, this is the entire basis of Capitals Context's ES Context model as well as their SPY Arbitrage model except in the first case many other assets are used including rates,/bonds, precious metals, commodities, other forms of credit derivatives, etc. while the SPY arbitrage is only 3 assets, the risk on HYG and risk off VXX and TLT.
This has made HYG one of the easiest levers for short term market manipulation, rather than the old days of buying or selling the most heavily weighted stocks in an average to get the average to move, now 1 asset alone can be manipulated and the HFT/Algo correlation programs follow it.
Above, while a little confusing, I show different stages of HYG's August cycle at the white arrows such as the bottom/positive divegrence of 8/1 while the SPX just started it's base/stage 1 accumulation on 8//1 which lasted through 8/8 with stage 2 mark up on 8/11. As you can see, by 8..2, HYG was already in the mark-up/stage 2 phase, once again its price divergences vs the market/SPX leading the broad market averages.
HYG transitioned to stage 3 top which is characterized by a lateral (sideways) trend before the SPX (I have marked the SPX's important transitions with yellow arrows). As you can see, HYG has led the SPX on average by about a trading week, even it's move to stage 4 decline was followed shortly after by the SPX's trend of lower lows and lower highs. The bottom line is HYG has led the market by approximately a trading week.
Obviously our minimum target was hit wand volume surged on the breakout, which is why I chose the downtrend as a technical feature that would create the desired effect of any head fake move to the upside, to get bulls to buy and for that as most everything they do is price/confirmation evidence based, a break above the downtrend was the closest area to get them to make moves and create demand that can be sold/shorted in to.
Just put these two on your chart and watch the correlation intraday.
What grabbed our attention last week and guided last Friday's "Week Ahead" forecast was the flat range in HYG with leading positive divergences which made it clear that this week we'd see market upside which I speculated was either to be used in conjunction with a F_E_D / F_O_M_C knee jerk upside rally on the grounds that the market had already discounted the bearish removal of the "Considerable time" language in the F_E_D statement and after the policy announcement, Yellen would give one of her typical dovish Q&A's walking back any bearish fall out from the language removal which had already been discounted by the market as a sure thing. The idea being, between HYG support and this F_O_M_C knee jerk-boost, our head fake move on a large month long stage 3 reversal process which we have been expecting for weeks , would finally pop and give us the entries in short assets as well as these moves being an excellent timing indicator.
Interestingly, neither the language was removed from the policy statement yesterday although Yellen made it abundantly clear in the press conference in which she was not her normal dovish self, that it is meaningless from the F_E_D's perspective as everything is data dependent. So why not just remove the language altogether? I suspect it was a red herring to distract from the fact that the median forecast for the F_E_D Funds rate continues to rise and did so again yesterday (the infamous "DOTS" ) for both 2015 and 2016 with yesterday being the first time the F_E_D put out 2017 guidance.
As I said above, we can see the underlying trade and divergences, but we can't know exactly why they are there. After yesterday's VERY weak knee jerk pop higher was completely erased before the close, one of the fastest F_O_M_C knee jerk fades I can recall, I started wondering about other possibilities for the HYG divergence.
Tomorrow's main event struck me as a VERY good reason for broad market support right now, THE ALIBABA IPO which may just be one of the largest, most over-hyped IPOs ever.
While the average IPO has raised about $5 billion and traded up +10% over the first week, you may recall from the FB IPO that they don't always tend to fare so well much longer. The last 5 largest US Initial Public Offerings fell on average -17% in their first year of trade according to Bloomberg.
However Alibabe may be one of the largest IPOs in history. At the median of the expected pricing of $66 to $68, Alibaba could potentially raise $25 billion, one of the largest IPOs in history with an approximate valuation of $165 billion.
However, this is where things get interesting and may have an HYG/Market support connection.
While typically an IPO is brought to market by 1 bank, Alibaba has five structured in the IPO deal. While the typical 6 month lock-up period which forbids insiders and deal makers from selling before the first 6 months, the top shareholders stand to make a fortune from the shares they agreed to sell in the IPO despite whether they are in the 6 month lock-up period. The 4 biggest potential beneficiaries include Soft Bank, Yahoo, Alibaba founder and executive chairman Jack Ma, and executive vice chairman Joe Tsai who aree all under a 1 year lock-up , but will own 58% of the company's shares after the deal.
Where this really gets strange is the 6 month lock-up period as public filings have shown $8 billion in shares from insiders/early investors have NO LOCK-UP PERIOD WHTSOEVER, and none of them are identified, meaning come tomorrow, approximately $8 billion in Alibaba shares can be sold immediately for a quick cash out, which is highly unusual for an IPO with the standard 6 month lock-up before any of these people would be able to sell. This obviously includes insider as well as the IPO staging companies, 5 banks, which is unusual as well. THIS IS ABOUT 1/3RD OF ALIBABA'S SHARES THAT AREN'T UNDR LOCK-UP, HIGHLY UNUSUAL.
Why put in such a clause if these insiders/early investors and IPO staging banks didn't have an intention of selling on the IPO or shortly after? The best description of these people from public filings are called, "Some holders of preferred shares", that's as far a identification of the group not under the IPO lock up goes.
In any case, if you want to exit at the IPO, one thing that would be helpful in market support to get out at the best prices possible.
We know that the market works days, weeks, months and even years in advance as shown with home builder accumulation in 1999 and 2000, well before the start of the housing mark-up and eventual bubble. Point being, the HYG positive divegrence that I assumed had more to do with a head fake move being completed , may have more to do with one of the largest, most over-hypped IPOs in the market's history, which could also kill two birds with one stone as far as our initial head fake move/support goes as well.
We won't know until we know, but we do know that HYG which is in a lot of trouble on a big picture basis, was used over the last week, was accumulated for market support and just before this historic IPO.
As for HYG divegrences, we did see the first signs of weakness after yesterday's knee jeerk reaction to the F_O_M_C faded and gave back all post F_O_M_C gains.
Right now HYG looks like this...
Intraday this is one of the first problems we have seen with HYG since the positive divegrence, right at yesterday's knee jerk highs.
There's at the end of the nearly week long HYG divegrence which just so happens to put in a head fake /stop run right at the white box, positive divegrence, before reversing to the upside, the head fake/timing concept in action. We also see some migration of the intraday negative to today's chart leading negative, but this is still small beans compared to the size of the positive divegrence over that week long period.
This is the primary divegrence we have been following and have based near term market upside forecasts like Friday's "Week Ahead" post on. This divergence is leading positive as it has been and still in line. This divegrence will have to deteriorate before I suspect a move to the downside is on its way, however interestingly the expected F_E_D motivation hasn't done much which makes me wonder if one of the largest possible single pay-day IPOs tomorrow, may be the real reason, it's a good reason.
Intraday the 5 min chart is showing some deterioration.
And the 4 hour chart shows the highest probability resolution for HYg which is clearly down. Interestingly we saw a lot of deterioration in nearly every indicator as of July 1st, the first day after Q2 Window Dressing ends, we see the same here with a leading negative divegrence.
The green arrow to the left is upside confirmation of the price move.
And worst yet, the daily HYG chart which hasn't shown any exceptional signals until 2014, which should be very clear as the deepest leading negative divegrence on the strongest daily timeframe chart.
Thus I have no doubt of the resolution to HYG's current stance and the market with it, as far as whether BABA is the reason, tomorrow will offer a lot more insight.
We've also had excellent luck with IPOs, some of you may recall the FB IPO which was a nightmare and it quickly became the most hated stock, we were the first to enter a long position on the FB decline which paid off big time while it was still the most hated stock so I'm looking forward to BABA, but more so to unravelling the short term signals and whether Alibaba is the real reason market support was needed as $8 billion is distribution on an IPO would need some significant market support to make it profitable, but why else put in such a clause allowing nearly a third of the shares usually under a 6 month lock up to be excluded right from the get go tomorrow?
Perhaps large IPO performance as cited by Bloomberg above might be a good reason given the market's condition?
Where this really gets strange is the 6 month lock-up period as public filings have shown $8 billion in shares from insiders/early investors have NO LOCK-UP PERIOD WHTSOEVER, and none of them are identified, meaning come tomorrow, approximately $8 billion in Alibaba shares can be sold immediately for a quick cash out, which is highly unusual for an IPO with the standard 6 month lock-up before any of these people would be able to sell. This obviously includes insider as well as the IPO staging companies, 5 banks, which is unusual as well. THIS IS ABOUT 1/3RD OF ALIBABA'S SHARES THAT AREN'T UNDR LOCK-UP, HIGHLY UNUSUAL.
Why put in such a clause if these insiders/early investors and IPO staging banks didn't have an intention of selling on the IPO or shortly after? The best description of these people from public filings are called, "Some holders of preferred shares", that's as far a identification of the group not under the IPO lock up goes.
In any case, if you want to exit at the IPO, one thing that would be helpful in market support to get out at the best prices possible.
We know that the market works days, weeks, months and even years in advance as shown with home builder accumulation in 1999 and 2000, well before the start of the housing mark-up and eventual bubble. Point being, the HYG positive divegrence that I assumed had more to do with a head fake move being completed , may have more to do with one of the largest, most over-hypped IPOs in the market's history, which could also kill two birds with one stone as far as our initial head fake move/support goes as well.
We won't know until we know, but we do know that HYG which is in a lot of trouble on a big picture basis, was used over the last week, was accumulated for market support and just before this historic IPO.
As for HYG divegrences, we did see the first signs of weakness after yesterday's knee jeerk reaction to the F_O_M_C faded and gave back all post F_O_M_C gains.
Right now HYG looks like this...
The green arrow to the left is upside confirmation of the price move.
Thus I have no doubt of the resolution to HYG's current stance and the market with it, as far as whether BABA is the reason, tomorrow will offer a lot more insight.
We've also had excellent luck with IPOs, some of you may recall the FB IPO which was a nightmare and it quickly became the most hated stock, we were the first to enter a long position on the FB decline which paid off big time while it was still the most hated stock so I'm looking forward to BABA, but more so to unravelling the short term signals and whether Alibaba is the real reason market support was needed as $8 billion is distribution on an IPO would need some significant market support to make it profitable, but why else put in such a clause allowing nearly a third of the shares usually under a 6 month lock up to be excluded right from the get go tomorrow?
Perhaps large IPO performance as cited by Bloomberg above might be a good reason given the market's condition?
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