LQD
LQD: Reversal at top of QE 4ever rangeLQD which tracks BBB-rated corporate bonds is reversing at the top of a a channel which started in 2012 when global central banks launched their QE forever campaign (Twist, Whatever it takes, ETF buying etc). You can see LQD break below a SSR near the top of a channel with negative short-term trend.
Lots of reasons to be bearish for corporate bonds, higher yields, more defaults and a slowing economy. #Watchoutbelow
LQD, Potential Inflection Point Is about to get TestedIn my previous LQD study I outlined a possibility to use the LQD as a leading indicator for equities. Looking at the daily chart a few weeks later we can see that the price is within a well defined wedge. Perhaps, the next week will bring a test of the wedge boundary. If there is an impulse breakdown it would be worth watching its effect on the direction of equities and perhaps to be cautious about investing in equities at that time. Let’s see if the LQD provides any hint.
Starting next week a bunch of mega cap tech companies will be reporting. Each of them is a market mover. Considering that the Nasdaq is at all time high the techs earnings will be under the investors microscope.
04/20/2019
LQD, A Leading Indicator for EquitiesLQD is an ETF that tracks investment grade corporate bonds.
www.ishares.com
In this study I compare the LQD with SPY that tracks S&P 500 index. Upon review of turning points one can conclude that the corporate bonds start to go down first and recover first hinting the broader market direction.
04/07/2019
Small Caps Lead Broader Markets $IWMSmall caps are often used as a gauge for domestic growth because they are more sensitive to changes in economic conditions, such as input costs, wages, financial stress...
Many were caught off guard by the equity rollover in early October, but few were paying attention to what was occurring. In late September, financial conditions began to tighten and credit spreads began to roll higher. I wrote about this several times for my subscribers. There is a strong correlation between dollar strength and rising credit spreads.
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The correlation between small caps (IWM) and credit is rather significant. The 30-week correlation between junk (HYG) is .92 and investment grade (LQD) .85. It's also important to understand that over half of all Russell 2000 companies make no money, which is detrimental when margin compression occurs.
There is no reason to doubt why the Russell rolled over, leading broader U.S. equities, just as financial conditions began to tighten.
The Curve Is Falling, The Curve Is Falling $TLT God bless the legacy financial media because their uselessness is a blessing.
Headline to headline is no way to live through live whether you trade oil or bitcoin. The click du jour is how the 2s/5s yield curve is now inverting, and the 10s/2s are at a mere 11 bps.
I have been one of the largest flat curve-ers out there. Why? Because my process shows why the decelerating in rate in change in both growth and inflation will sink the back-end and the front steepening eases.
On Sept. 6, I wrote in "Cognitive Dissonance: What the Yield Curve Is Saying:"
"A lot of headlines have fluttered across the wires on the 10s/2s yield curve on a continuous path to inversion. Neckties on legacy media continue to say a flat or inverted curve doesn't mean much.
I reckon, given the directional trajectory of both the curve and MVR inflation matrix that the curve is signaling market's expectations on inflation.
Generally, this would make sense given that the steepening from a curve inversion is triggered by the fed's policy stance on interest rates during the end of the cycle."
The concerns about increasing U.S. supply in paper is valid, but the concerns of too much debt issuance over demand becomes "where do I put my money" concerns.
That's likely treasuries, increasingly so as investment and junk credit continue to breakdown.
Strong #Dollar Themes ContinueOn October 30, I published "Stronger Dollar Themes To Continue" for my subscribers, which gave a unique approach to why the dollar is rallying even tho traders foresee Fed policy getting dovish: credit spreads.
"Now, when comparing credit spreads to the financial crisis it doesn't seem to be "that big." Combine record U.S. corporate debt, a highly distorted high-yield market and slowing economy, and you got the makings of a credit crisis. The move this year is not only noticeable, but inflects from the previous couple years of lower-lows."
"The rate of change in spreads is remarkable, actually. Just look at the move in spreads and the monthly close of the trade-weighted dollar index (major FX)."
As credit conditions breakdown and high-yield/investment grade spreads widen, the dollar continues to march higher as a representation of the dollar shortage.
Take a look of what the HYG+LQD basket (inverted scale) does when the dollar strengthens:
Now take a broader look:
Near-term quantitative ranges are dotted, while longer-term levels are solid. By Q1-19, the DXY will likely be triple digits if not sooner.
LQD Credit deteriorating /- just a rough idea, if credit started to widen and back to 2016 level .. SPX still a lot more room to dive
- it will be more than systematic issue if credit get worse
- Bull has to fix the market asap as both LQD/HYG is nosediving now
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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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.
