Here's a look at Leading Indicators and the biggest developments of the week. If I have time, I'm going to try to explain why the saying "Credit markets lead, stocks follow" in a subsequent post, but as you probably know, the last two hours of op-ex Friday often gives me some of the best data of the week so I'll do my best, but I will cover it because HY is screaming and stocks will follow.
In my opinion the biggest developments of the week other than the re-introduction of volatility the last day or so (not today) as I remarked earlier in the week, "Volatility tends to slowly die down, but from low levels it explodes". If we look at volatility in its most common measure, the VIX, high volatility is a high VIX which trades opposite the market, meaning high volatility often is the result of a sharp market decline.
The real developments though have been accumulation in VIX futures well above and beyond any divergences I can recall this year including the negatives at the October lows before the rally started.
The other interesting indication is Treasury bonds accumulation, if VIX futures are the "Flight to protection", Treasuries are the "Flight to Safety", as I have hinted at this week and specifically last night, I think we are on the cusp of a major treasury rally, again they tend to trade opposite the market implying a sharp market move down which is something I have expected since we first got wind of accumulation for the October rally nearly 2 weeks ahead of the actual rally's start.
Take a look...
THIS IS ONE OF THE MOST SIGNIFICANT MOVES IN ASSETS THIS WEEK, THE CRUSHING OF THE MARKET RAMPING LEVER HYG, (High Yield CORPORATE Credit), which just sold off sharply over the last 3 days.
Looking at Pimco's High Income (Credit) Fund in green vs the SPX in red, note the absolute carnage in HY Credit.
I'll try to cover this in greater detail so the mechanics are more clear.
And Pimco's fund in green vs the SPX over the course of the October rally which started at the green arrow. Anything look familiar? Almost every Leading Indicator looks similar to the dislocation or divergence between Pimco's High Income Fund and the SPX, meaning all have deteriorated at about the same time ( a VERY LEARGE dislocation) and all very sharply, much stronger then the leading indicators at the October lows which caused us to try to anchor expectations by saying this was going to be a face ripping rally that will have you scared even though you have advance notice days before it started", followed by the challenge to "Book mark this post and come back" as you'll see, the rally will be that strong you'll feel fear to short in to it, which is something no one at the time was thinking as sentiment was as bearish as it could get. No one could imagine even a bounce, much less this kind of move, so what does that tell you about the size of the current leading indicator dislocations?
HYG's 2 hour 3C chart and long term distribution, it is especially sharp right now at a new leading negative low.
HYG 30 min from in line with 3C confirmation of the uptrend at the green arrow to a leading negative divegrence in June and a worse one now.
Just looking back at past posts...
July 25ths Daily Wrap post, this is right at the SPX top before sharp decline in to the end of July and about 15 days before the August rally started...
"High Yield ETFs and funds have seen huge outflows the last month, THIS WEEK SAW THE LARGEST OUTFLOW FROM HIGH YIELD FUNDS IN MORE THAN A YEAR! Much of the flow has gone to low yielding, defensive Investment Grade Credit."
August 14th's Daily Wrap just as the August rally was starting the next day or two...
"Lastly, as we moved toward a base/bounce I noticed some inflow (small) in to HY credit which I figured was for a bounce "
And this chart and commentary from August 18th's Daily Wrap... just as the rally got started for August...
"Here's the massive outflow. The market cannot stay up with HY credit falling, thus the saying, "Credit leads, stocks follow". You can see the tiny inflow last week for the bounce."
And from our Sept 12th Important Market Update which was going in to the August cycle's head fake move and change from stage 3 top to stage 4 decline with an SPX decline in to the October lows of more than 8% and a Russell 2000 decline of more than 11%...
"According to Lipper Data, for the week ended Sept. 10 US High Yield bond funds saw an outflow of $765.8m , which is the second consecutive week of outflows as the previous week saw an outflow of $198.1m. I think it's pretty clear to see that HY fund flow (much more coming out than what went in in late July/early August, is leading the market and pretty well synced with assets like High Yield Corporate Credit (HYG)."
It's obvious that while the trend is hugely toward outflows from HY credit, we see small inflows for bounces or market lever support such as HYG just before a rally starts.
HYG's 15 min chart in to the October rally with a sharp leading negative 3C divergence with the sharpest 3C decline the last day (yesterday) at the red arrow.
The longer term HYG/SPX correlation with HYG supporting the SPX through most of 2013 and as of June when huge outflows from HY Credit began, look at HYG's leading negative dislocation from the SPX, they are literally moving in opposite directions with the SPX making new highs and credit making new lows with large divergences at each SPX pivot high. Credit markets are much bigger and more sophisticated than Equity markets, they are telling you two different things, which do you trust?
And this week we have seen VIX and VIX short term futures outperform the SPX almost every day. Here's VSXX, short term VIX futures vs the SPX just today, I have inverted the SPX prices (green) so you can see the natural inverse correlation and differences in relative performance.
At the green arrow VXX is moving as the correlation would suggest, in line with SPX, but today for a 4th consecutive day, VXX outperforms the SPX as VIX futures are bid.
The spot VIX has also been outperforming the SPX all week, again SPX prices (green) are inverted. Note the SPX trend is nearly flat through the week while the VIX's trend has been up, this is because protection has a solid bid under it, demand = higher prices.
Not only is there a Flight to Safety, but a Flight to Protection". Why do you think large caps outperformed small caps yesterday so massively?
And the chart of the week, the 60 min VIX Futures, this is not hedging, this is a HUGE leading positive divegrence/accumulation of VIX futures. Someone with very deep pockets has been accumulating VIX in size that is at least 15 times larger than the distribution at the October lows before this strong rally.
VXX short term VIX futures 2 hour large picture chart and highest probability resolution for price leading positive at the move up (in VIX-down in equities) that led to the October low in SPX (at the top of this move) and the current leading positive divegrence, even higher and stronger.
Note the head fake move at the yellow arrow just before the upside reversal.
UVXY 2x long VIX short term futures 60 min chart with an impressive divegrence now, again note the stop run/head fake move at the yellow arrow just before the last reversal to the upside.
I suspect some of the market action seen this week including AAPL is such a head fake move, you know the concept.
XIV, inverse short VIX futures, this moves with the market unlike VIX, yet look at the distribution at pivot highs and the lower lows in price vs the SPX as well as the sharp leading negative divegrence this week.
VXX short term VIX futures 30 min, again the head fake move before the last rally (yellow) and the current positive, much like actual VIX futures above.
XIV-the opposite of VXX above, again at 10 mins showing strong distribution this week.
Note the head fake move just before the downside reversal, this is the same time as the head fake move in the SPX in September as the August cycle transitioned to stage 4 decline.
XIV 5 min leading negative especially strong this week.
VXX short term action looks like a near term pullback before it launches higher, perhaps a head fake move/stop run?
And of course one of the other big developments of the week, the VIX buy signal on our custom buy sell indicator, only the second signal of the year.
VIX sell signal at the SPX's October lows and a current buy signal, more interesting, look how VIX has performed since the buy signal...
It has been trending up this week with the buy signal marking the week's lows on Monday.
30 year rates...
As shown earlier, they not only called a top in yesterday's intraday SPX move in the morning (red trendline), but are leading negative today.
Rates move opposite treasury bondx, this is the 60 min 30 year Treasury bond futures with another leading divegrence similar to VIX futures.
And the 20+ year Treasury bond fund, TLT with a 60 min leading positive divegrence.
The 2x inverse TLT, TBT with a matching negative divegrence as confirmation, the green arrow being the October lows and small accumulation there.
TLT 10 min with October lows at the green arrow and small distribution compared to the positive divegrence now.
And the inverse TBT with a confirming opposite leading negative divegrence, with notable weakness this week.
TLT 3 min looks like it's about ready to fire...
10 year yields also leading SPX price (green) lower today
While the 10 year treasury Futures lead positive.
And 5 year yields leading the SPX lower (green), while...
5 year T-bond Futures show a leading positive divegrence. Remember bonds and yields move opposite each other and yields tend to pull equity prices toward them like a magnet.
As for professional sentiment...
Again we are seeing it sell off vs the SPX in green and the trend...
This is since the July decline and the October lows and rally, there's a very clear professional sentiment divegrence.
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