High Yield Corporate Credit-Pressing Advantage

The most simple way I can describe High Yield credit is as an institutional (long) risk asset , similar perhaps to the way we might consider UPRO (3x long SPY) a long biased risk asset when we are bullish the market.

Institutional money obviously has the edge in every way from inside information directly from the F_E_D to speed, experience and money. It would be crazy to trade against institutional money, but how do we know what institutional money is doing ? 3C is an attempt to answer that question, but one far more readily available , yet little known is High Yield Credit whereas Investment Grade Credit is akin to the flight to safety trade or moving from long stocks to long bonds.

What happens when the stock market and HY Credit disagree? Who do you think is smarter? Better informed? Has the assets to move the market?

And now you know why High Yield Credit has been among our Leading Indicators since we introduced the layout. It would be foolish to trade against smart money, but that's what happens and HY Credit as a leading indicator has warned us many times in advance, thus giving rise to the market maxim, "Credit leads, stocks follow".

A quick look at HY vs the SPX...

 This is HY Credit in red vs the SPX in green since the lows of 2009.

Typically in a risk on move that is legitimate, HY Credit and the market (SPX green) should move up together as they do here as both are risk assets.

If we look closed at the 2009 low...

Note that both the SPX and HY Credit both sold off together in to the 2007-2008 decline, but HY credit bottomed first and was already making a higher low (positive divegrence) by the time the SPX (green) bottomed, thus HY Credit was leading the market as it typically does when they are not trading together.

After...

HY Credit (red) moved up together with SPX (green) as both are risk assets.

However recently something big has changed, HY Credit is making a series of lower lows and lower highs, a downtrend as opposed to the SPX's "apparent" uptrend (I say that because I believe it's truly a Broadening megaphone top).

In any case, Institutional traders are essentially running scared, no longer interested in trying to top tick the market, but moving quickly to get out of the way of what they clearly expect to be a large move to the downside as there has never been a divegrence this large in Credit vs the market.

Who do you think has the better information? It's like the parable of the Army Captain and the minefield. Just because the captain closed his eyes , walked across the minefield and survived, doesn't mean that this is the proper course of action and it's a lesson that will eventually end with the captain's demise.

Of more recent interest is the HY Credit divergence between stocks and itself at the October rally, one of the biggest ever.

In yellow is the last divegrence that we saw and called for a top, it's barely noticeable now because of the size of this one.

 Intraday HYG gave some support, but has faded since without ever going green.

This 3C chart shows today's intraday HYG support, but more importantly...

 The larger 2 hour 3C chart's trend tells us to look for lower HYG lows.

As for the recent bounce to help the market, which remains below yesterday's close, note the 10 min leading negative divegrence, beyond the 5 min chart I was using as a barometer.

Know when the market supports your position and when it does not and I would not ignore this rare glimpse in to what institutional money is really doing, it's a red flag that few know to look for and it's screaming the message of the market right now.