HYG
Is $HYG leading $SPY Lower? Pt.2There is no question that credit markets have been distorted for a long-term, but, fortunately, if you are in tune with what is going on it help get you out of the way of a steam roller.
High-yielding junk debt has been a huge trade this year as investors continued to seek yield despite valuations and a clear crowed trade. The chase for performance also led investors to pile into corporate debt as the "safer" alternative to junk and grossly negative European debt. Unfortunately, the tide has been turning and investors are beginning to pay for it.
Junk debt has seen six consecutive days of declines as flows continue to come out of these exchange-traded funds like HYG, seeing a single-day record outflow of nearly $1B, and JNK. There also has been little coverage on the corporate side, but capital is also bleeding.
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And we are witnessing some troubling signs that could cause spreading implications to broader markets. Nearly a year ago, 361 days to be exact, my " Is HYG leading SPY Lower " pointed out a pivotal point for markets. In less two months later we saw junk yield spreads absolutely blow out to over 1,000 bps and stocks saw the worst start to the year ever.
With a combination of a highly anticipated Federal Reserve rate next month hike and slowing growth (sound familiar?) volatility has been insidious.
Technically, the price action near-term is oversold but over the course of the next couple months that will likely not matter, we could see a January 2016-like selling spree as uncertainty creeps up.
On a longer-term perspective,, HYG has been trading within a HUGE triangle, and lower support will be tested!
The near-term trend broke, and today's price action is seeing some support on the 200-day EMA. The momentum is gaining quickly with the ADX-indicator popping from 10 to 15, while topping 20 will indicate a substantial price trend. From my previous note last November, we saw momentum gain from 17 to top at 48.
Even if Janet Yellen backs away from hiking rates (which will cause a mutiny on her hands), the strength of the DXY on the back drop of slow, grinding-lower growth will put continued pressure on junk bonds.
Furthermore, as with last November, we see lower crude oil from here; and this will undoubtedly cause concern for high-risk shale producers.
Trend cautiously. HYG at $70 is our 6-month target.
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Short book: HYG - Topping patternToday we added a couple shorts, I'm posting the trades we currently have open but not providing entry/stop suggestions. Only trade them if you have a trading strategy, or, ask me if you're interested in learning more about the one we use (Tim West's 'Key Hidden Levels' and 'Time at mode').
We have some worrying bearish signals, so it's a good idea to have a market neutral position, picking stocks to short, while still looking for longs in undervalued companies.
See related ideas for the rest of the trades we took. You may still be able to join them or wait for a secondary entry when/if we decide to add to them.
Good luck,
Ivan Labrie.
HYG/TLT: Short the ratioWe have an interesting pair trade here, you can take a short position in HYG, paired against a long in TLT to capture the profit from the spread closing. Right now, HYG moved too much, relative to TLT, so it's bound to correct back down, giving us a low risk trading opportunity. Position size should be enough to theoretically risk 0.5-1% of the account if price moves 3 times the daily ATR against you on each side (individually). You might have to hold a trade while it's in loss, but the combined profit/loss of the pair will result in a profit if the analysis is correct and this ratio starts to decline sharply.
We pointed this trade out at the Key Hidden Levels chatroom today. For more information contact Tim West, or me.
Cheers,
Ivan Labrie.
HYG: Potential weekly short in playHigh yield corporate bonds are at an interesting spot, if we get a new weekly low, we can go short as described on chart.
You should wait for the market to open to enter the trade, don't place pending orders before then.
Good luck!
Ivan Labrie,
HYG - ISHARES IBOXX LONG SETUPAccording to the price action the 82,24 level could be a good support. The pullback shows a first leg up, AB, and a correction. A good entry in this retrace could bring to the 84 level as a possible target. I'm looking for an AB=CD pattern. The target is a resistance area too. Risk reware ratio 4,5. SL below 0,382 fib line.
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Credit ratings of the US firms are deteriorating fast-pace. This year we will see new record in corporate defaults. We have seen this year already 32 global corporate defaults (2009 there was 42, this year we will have more than that!).
This could be a turning point of this nonsense rally.
Short if the neckline breaks. Potential H&S formation.
Gold Miners Could Pullback Before Resumption of Trend.Gold prices have been volatile, flucuating between $1,275 and $1,220 as markets remain indecisive on what stance to take: is the Federal Reserve going to continue hiking assuming the economy will "gradually improve," or with traders continue to look for safer locations to place there cash?
According to recent capital flow data, the GLD has seen redemption as market participants choose to overlook the weakening global economy and its implications. Nevertheless, with inflows into risk ETFs like SPY and HYG, gold miners could see their shares pull back from this historic gold run.
Technically, after GDX broke out of a longer-term downtrend, price action began to oscillate within a narrow ascending channel. Prices are likely to pullback to channel and price action support of $19.80, while a confirmed break (or daily close below support), miners could fall to $18.85 and, potentially, $17.85 - also nearing the 50-day EMA.
However, if the popular mining ETFs can remain above support, price action could challenge $21.88 and $23.03.
Overall price action and trend momentum still remain rather supportive to the upside.
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The Dimon Bottom Hype Is OverCNBC has loved to refer the recent pullback in the SPX as the "Dimon Bottom" because CEO Jamie Dimon purchased roughly $26 million worth of JPM shares. However, it's not looking for those wanting to hold to believe in the recovery dream.
Whether investors want to believe it or not, the U.S. economic cycle is rolling over; and, considering the very high correlation to the SPX, J.P. Morgan shares will unlikely be saved.
Since 2014, I been warning of potential headwinds from energy exposure in U.S. banks. It may not cripple the sixth-largest bank in the world, but death by 1,000 cuts won't be any better for shareholders.
On Tuesday, JPM reported a 20 percent decline in trading revenues, as well as a $500 million increase in provisions (up 60 percent) due to their energy exposure. Fee revenues were down 25 percent.
Technically, the weekly chart is showing more downside is to come. Traders are watching a 20-weekly bearish convergence with the 50- and 72-weekly EMA. Price action is, also, currently below the 200-weekly EMA.
The inability to show support above this level and challenge $59.60 could poise further stress on shares.
Near-term, we'll see price action test the trend/price demand between $52.30-$53.50. A close below $52.30 would open up $48.3 and trend lower to $43.74.
If looking at Fib. retracements, a close underneath Aug 24, 2015 Black Monday low, 1.618 Fib. extension would stand at $37.54. This would be my target for Q2-17.
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High Yield in Trouble... AgainI want to start this year with a market I have been watching closely recently, and for good reason. The HYG, which is the most liquid high yield corporate bond exchange traded fund, has taken a beating over the past few months and looks ready to make another move lower. Not only is this trade attractive from a technical perspective, but the fundamentals are on our side as well given rates are poised to move higher this year.
We can see on the hourly chart below that a breakout over 81 failed to materialize and we are now coming off of near term resistance on a pivot bar. Additionally the momentum indicators are showing more room for downward movement, while volume profile needs to be filled in to the downside.
Based on the technicals, I would like to get short at current levels with a stop up at the bottom of the supply area at 80.68 and a target of 79.00 (3:1 r/r). I will give this trade no more than a week.
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HYG monthly - a lesson - 12/11/2015I did not monitor HYG closely and thus totally missed the short opportunity. Looking back, I put the timing method on the chart (easier when looking back, isn't it? : -).
HYG -- PREMIUM SELLING PLAYYou know what they say, one's man's junk is another man's treasure ... . With an IVR of 100 and an IV of 18, this may be as good as junk is going to get for premium selling (don't quote me on that; further sell-off could be on the horizon ... ).
HYG Jan 29 74/84 short strangle
POP%: 75%
Max Profit: $109/contract
BPE: ~ (Undefined/After Hours)
BE's: 72.91/85.09
HYG Leading SPY Lower?Junk bonds are typically just that - junk. But, the iShares High Yield Corporate has been one of those crowded trades that just do not die.
After witnessing the immaculate short squeeze from 1,864, the SPX staged an impressive rebound. But as I mentioned earlier today (on my InvestFeed - link below), the SPY is looking weak, and the ADX, which measures trend strength, is beginning to fall.
This is interesting because HYG tends to flow with the SPX (and SPY). As equities had a sharp correction so does high-yield The opposite is also true, and junk bonds rallied along side equities. SPY also acts more "violently" when prices diverge greatly.
According to ETF Daily News, roughly $10.7 billion was injected into U.S. equity ETFs last month, while $8.3 billion of inflows were seen in U.S. corporate bond ETFs - the largest monthly inflow recorded. HYG took in just over $5.5 billion.
This is important because today's trader shows the epitome of herd behavior: all cramming into a few trade ideas. So, when that idea doesn't material, traders flee and the response is not exactly orderly.
Price action is on a few minor support levels, but there is bearish EMA, RSI and DMI momentum. ADX looks to be moving upwards supporting negative price action.
If the SPY breaks down lower (I'm expecting mid-160k NFP tomorrow), this could spell trouble for HYG.
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HYG TLT Breakdown being back testedThe break down in the long term trend line of HYG/TLT that occurred in December is currently being back tested. If the breakdown holds, this will mean Treasuries are set to outperform HY. Reversing the under-performance of treasuries to High Yield that started in February. A quick move to $88 from current $90.35 on HYG would not be surprising.
When Credit Goes, So Does EquitiesWhat 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 breakdownHigh 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:HYGUpdate 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 SpreadsGetting 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 marketsThis 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 PullbacksAs 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 DilemmaI 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!
