Leading Indicators Not Giving Away Much Short Term

Of course longer term we've been watching these deteriorate on a near daily basis with Credit being one of the best leading indicators (High Yield) other than actual market breadth which has been incredible, this is why you have to look everywhere to put the objective pieces of the puzzle together, one week a carry trade might tell you all you need to know and like last week, it suddenly stops working and there's something else giving you clues. As I said, not much from Leading Indicators yet, which I'm taking as a "yet" rather than the probability that there will be no bounce, but that possibility has to be considered as well with the amount of damage in the market.

This is part of the new Indicator I'll be adding to the Leading Indicator layout, it's VIX Inversion on the bottom, the red bars are a bullish short term signal, but it's not as simple as interpreting any rising signal as being bullish, it matters where the market is, what stage and much more. VIX Inversion is pretty close to 1 month highs so there's some concern out there.

There's also a Russell 2000 / S&P-500 ratio (cumulative) indicator in the middle (red), which is read much like RSI divergences. To the far left when VIX Inversion gave a signal (red bars) you can see the r2k/SPX ratio making a positive divegrence rather than confirming a new low. We already knew by this point to expect a bounce, in fact we suspected in July 31st as the SPX closed down 2% on the day and had already moved some positions to take gains on the decline, so we had a pretty good feel on 7/31, we saw accumulation on 8/1 so these signals are just more confirmation.  To the far left, while VIX inversion is near 1 month highs, our R2K/SPX ratio is still confirming a lower low and thus not giving us the positive divegrence in 3C for some of the averages today as was expected Friday afternoon during the market hours and after market in the Daily Wrap post once I looked at the closing internals. This may be because it's a smaller breadth based indication for this week rather than a larger base being put down at the right spot, after some decline (as we could argue the SPX is currently stage 3 or starting stage 4). This is what I mean when I say these are not as easy to read as just seeing a higher VIX Inversion and assuming it's bullish.

Just as HY Credit Flows (in and out) gave us a hint (with inflows in to early August) that there would be a bounce as these small in flows were the equivalent of our piggy back longs (rising the trend or bounce, but in a smaller, more speculative way) and just as recent huge outflows from HY the last 2 weeks are telling us something about how smart money views the market, the SKEW Index has given similar signals, but again they can't just be interpreted like Stochastics overbought/oversold signals which I think are a very poor way to use Stochastics.

For example...

The SKEw Index (the Black Swan Indicator) had seen a VERY rapid rate of change to the upside vs the SPY (red) in June and stayed elevated (meaning there was a strong bid for deep out of the money puts, as if smart money was either expecting a market crash or they were holding enough long positions that they were hedging against a possible market crash as SPY was at a pivot new high).

Note SKEW, just before the end of July, started to move down pre-emptively BEFORE the SPX and reached a level below 130 , while still elevated it was out of the very dangerous zone  as if smart money knew a bounce was likely. At the same time in the white box the SPX was making its stage 1 base from 8/1-8/8 and as it started moving up on 8/11 to stage 2, SKEW also went higher, except this time SKEW is was not as high as the former range, even though SPX prices were higher. 

This can't be interpreted out of context. While the market moved to a higher high and SPX 2000, it appears there was much less long exposure which means SKEW or deep out of the money put hedging wouldn't be as necessary.

For example, there was a large relative negative 3C divegrence in to July and a stronger Leading negative divegrence in to late July where the SPX had made the last pivot high (#1 in the yellow box). 

You'll see the white accumulation period the first week of August in 3C, still not large and the move up to SPX $2000, however look at the leading negative 3C levels at #2 vs #1 even though #2 is a higher high. This would mean there was less smart money exposure to longs and less need to hedge using deep out of the money puts. BREADTH READINGS VERIFY THIS INFORMATION. 

The simple point is these readings must be taken within context of all the information we have, not as stand alone indicators.

Back to Leading Indicators...


 Intraday today, while we know the 3C chart of HYG repaired some of Friday's damage to a nearly week long positive divergence in HYG, which could, if HYG moves higher, be the lever or manipulative ramp that the market needs for the bounce I forecasted for this week as of last Friday. However, comparing actual HYG (blue) price today vs SPX (green), we see that HYG , while moving in a similar direction, was lagging the SPX, leading me to believe that the accumulation/base area started today for the oversold breadth bounce from Friday's "week Ahead" post, is likely not finished, which also means a call/long position may still open up with much lower risk, a better entry and timing. However the major trade is still shorting our Trade-Set-ups in to higher prices and weaker underlying (3C) trade; this is the trade of highest probabilities and the reason I'm not letting go of any of my core short positions as things get more chaotic from here.

 The longer term HYG/SPX chart which you have seen many times shows why  I love HY Credit as a Leading Indicator as not only did HYG bottom on 8/1, while the SPX bottomed 8/8, HYG also transitioned to stage 3 (from the yellow hash mark on the left to the right ) before the SPX (orange hash mark from the left to the right) and  HYG transitioned to stage 4 decline first as well at the first red arrow and a case can be made for the SPX in stage 4 decline at the red arrow on the right.

As for a bounce, HYG seems to be leading there as well, nearly a week ahead of the SPX. However the bigger picture or totality of this chart should show that HYG is done despite any potential bounces, the damage is done and it's next major move is to a new lower low which will change its trend classification.

Intraday though, no leading signals except perhaps that the market pulls back a bit toward today's intraday lows and tries to widen today's basing activity which I'd think it would need to do to break through the SPX downtrend channel since last week.

Afternoon price action in the SPX, NDX, Dow and R2K was given away by the NYSE TICK Index as well as potentially some of the leading indicators.

This is why I encourage you to watch intraday market breadth via the NYSE $TICK Index as the channel I widened out for the afternoon uptrend clearly made a series of lower highs and ultimately broke below the channel, giving advance notice that this was a probability for the market as we saw in to afternoon trade.


 Our professional Sentiment Indicators have been very negative with a couple of 1-day leading divergences last week, but all in all the sentiment indicators (blue) have been moving in a downtrend with the SPX (green) and at every point where there's a divegrence between the two, out Sentiment indicator's divegrence has been right (yellow boxes all show sentiment diverging negatively from price and sending the SPX lower).

Intraday there was no edge here at all, the indicators were in line with the SPX, which in and of itself can be slightly short term bullish for the SPX as they were NOT leading negative today, but in line.

 Here's the bigger picture of the Pro-Sentimanet Indicator in blue vs SPX for the August cycle. Again  the leading indicator bottomed first, took off to the upside first, went lateral/stage 3 first and started leading negative first and continues to lead sharply lower.

DON'T LET SHORT TERM SIGNALS GET YOU LOST IN THE LINES, UNABLE TO VIEW THE BIGGER PICTURE OR HOW THE SHORT TERM IS BEST USED TO ACCOMPLISH STRATEGIC GOALS FOR THE BIG PICTURE.

 Short term VIX futures were leading the SPX and outperforming today, in line with some of the VIX inversion we saw above. Typically VIX and VIX futures (blue) move opposite the SPX (green), instead today they showed a solid bid to the upside. To give you an idea of the outperformance of the VIX futures vs the SPX I flip the SPx's price. When I do this, VIX futures and SPX should move exactly together.

Here I have inverted SPX prices for the day and left VIX short term futures (blue) normal, as I said, normally they should move exactly together in this instance instead we see VIX futures outperforming in the afternoon substantially.

 While Yields have been out of whack recently, we have used yields as a leading indicator as the market tends to be pulled toward them like a magnet short term. "IF" the former correlation has returned, then this chart would suggest the SPX (green) should bounce toward yields (red) in the very short term.

As for High Yield Credit (not the same as HYG and not used to manipulate algos like HYG), it has been retreating and confirming the SPX downtrend. HY Credit is like the NFLX (momentum play) for smart money. When they are in a protective mode they sell HY credit and rotate to investment grade much like stocks would rotate to bonds. This HY credit (orange) vs SPX shows a confirmed downtrend, however once again, for a short term bounce, although I'd like to see leading indicators lead, they may be too locked in to the bigger picture as (I already mentioned) , the market may already be in stage 4 decline.

Commodities seem to have reflected weakness in China and Europe that we are just starting to really see the extent of recently. However there may be a bounce there as well as a base like area looks to be under construction.

Again, I don't expect any bounce to be anything like the August cycle, more like last Tuesday's deeply oversold breadth and Wednesday's following close higher, but a bit larger than that.

More coming....