Page 7 | HYG — Trading Ideas on TradingView

When Credit Goes, So Does Equities What makes anyone think this time is "different." The SPX decoupled from high yield credit (HYG) in 2013 for the first time since 2007. The onslaught of poor US economic data will continue to weigh on equities regardless of the desperation to hold onto the feel good story of growth. I expect a 20 percent pullback to the 200-week EMA at 1,810.

HYG-TLT 6 Yr wedge breakdown High Yield corporate bonds are breaking down relative to long dated govt bonds. It appears the break down of this 6 yr wedge help accelerate the losses in HYG during last week while helping TLT add to its gains. The bottom trend line of the wedge has been an important support line for this ratio over past several years. With this break down, it seems possible for the ratio revisit the lows seen in both 2011 and possibly 2008. Most likely through more losses in HYG and more gains in TLT. If S&P 500 is going to find a tradeable low heading into the end of the year, it would seem that this ratio will need to stabilize. As can be seen in this chart, any important previous low made by the S&P500 has also seen a corresponding low in this ratio.

UPDATE: SPY:HYG Update to chart linked below. In that chart it was noted that HYG had at tendency to bottom at or before SPY during pullbacks. The average since beginning of 2013 was for HYG to bottom three days prior to SPY but occurrences ranged from same day to six days prior. After breaking the rising trend support going back to 2009 the selling in HYG has picked up momentum. Short term it looks like HYG is approaching an area that has been important in the past. That range appears to be 86-87.25. I think this is an area worth watching, a ST bottom here would likely help SPY find a bottom as well next week. A bottom that might last at least through the end of the year. However, If HYG slices right through that support area it would likely not be a good sign and would almost certainly lead to further selling of SPY. Looking further out, if support is found near ~87, i suspect the the next area of support 82.5-83.5 will still be tested at some point in the near future. The selling in HYG for now has been largely attributed to Energy companies highly leveraged to price of oil. However, it seems quite naive to think that the energy sector was the only sector to see a significant mis-pricing of high yield risk over the past couple years.

Corp Credit Spreads Getting nervous yet? Spreads contract, equities typically run higher and vice-versa. Well, spreads have been expanding and yet equities have surged higher. Small caps have not participated like the SP500. Perhaps one is lying? "Long" spreads expanding. Some reading from the NBER National Bureau of Economic Research: Credit Market Shocks and Economic Fluctuations: Evidence from Corporate Bond and Stock Markets To identify disruptions in credit markets, research on the role of asset prices in economic fluctuations has focused on the information content of various corporate credit spreads. We re-examine this evidence using a broad array of credit spreads constructed directly from the secondary bond prices on outstanding senior unsecured debt issued by a large panel of nonfinancial firms. An advantage of our "ground-up'' approach is that we are able to construct matched portfolios of equity returns, which allows us to examine the information content of bond spreads that is orthogonal to the information contained in stock prices of the same set of firms, as well as in macroeconomic variables measuring economic activity, inflation, interest rates, and other financial indicators. Our portfolio-based bond spreads contain substantial predictive power for economic activity and outperform---especially at longer horizons---standard default-risk indicators. Much of the predictive power of bond spreads for economic activity is embedded in securities issued by intermediate-risk rather than high-risk firms. According to impulse responses from a structural factor-augmented vector autoregression, unexpected increases in bond spreads cause large and persistent contractions in economic activity. Indeed, shocks emanating from the corporate bond market account for more than 30 percent of the forecast error variance in economic activity at the two- to four-year horizon. Overall, our results imply that credit market shocks have contributed significantly to U.S. economic fluctuations during the 1990--2008 period.

One year of divergence between stock markets and bond markets This is a similar chart to that published by Technician (see related idea below) that shows a clear divergence between stock markets and bond markets. I realize after making this chart that I had identified several bearish signals in bond markets at the start of the year, and I thought that we would thereby see a stock market correction in 2014. Stocks are the only asset class that has been subject to a sort of risk-off trade this year, and one might suggest that certain factors like corporate buybacks explain the divergence we've seen between the SPX and the HYG/TLT ratio.

SPY-HYG During Pullbacks As others have noted, HYG can often be used an indicator for market turning points both to the downside and upside. In reviewing all significant pullbacks since Dec-2012 this seems to hold true. Of 8 occurrences looked 6 occurrences had HYG bottom before the S&P. 2 occurrences showed them to bottom on the same day. Average length for SPY to mark a low after HYG was 3 days with 6 days being the largest. HYG and SPY are both sitting near long term support lines. HYG bounced off theirs on Monday. SPY touched the support line yesterday. It should be noted that HYG did not make a new high like SPY did (2007 top in SPY showed same divergence). Watching HYG's bounce off its support line may give some clues to whether more weakness is ahead. A new downtrend line may be developing in HYG and if it can not be cleared this may cause problems.

Triple Dilemma I don't have the stats, but you probably know that many S&P 500 companies are using debt as a way to finance its share buyback program. (Yes, I'm talking about you Apple) So these companies are in a triple dilemma. 1. Investors are closely scrutinizing their bottom lines every quarter (Whatever happened to the big picture and the Oracle of Omaha, the Moses of Investing, no wonder people love to say they believe in what he believes in but actually don't give a sh!t about what he believes) 2. Considerable time or not, Fed is raising rates, spread is gonna get bigger. 3. It's midterm, the last thing that the Congress wants is, well, to actually do something. So even multinational companies have an abundance of cash, they can't bring it back without getting taxed. I've only been trading for a little while, so all I know is drawing lines or stuff...but the chart does look dire to me. CNBC is having all sorts of clowns on today talking about this is a long secular bull market, that got me even more worried. I know my credibility just got hammered by mentioning CNBC, but please let me finish, I watch it for entertainment purpose, it's like a financial reality show+tabloid, how cool is that!