What I wanted to show is the yawning disparity between High Yield Corporate Debt, represented by HYG (above in candlestick form, left-hand axis) and the S&P 500 (above in line form, right-hand axis). During strong bull markets, investors bid up equities and high yield debt side by side. When things get rough, however, the risk of default begins to rise and junk debt sells off. Throughout history, debt markets lead equity markets. Debt investors are often referred to as the "smart money" while equity investors are the "dumb money."
As you can see, HYG and the S&P track pretty closely most of the time. If you extend this graph back a few years, you'll see a very tight relationship between the two - one never straying too far from the other. Things really began to change back in August when HYG started falling (heavily) while the S&P just chopped sideways. By the time August 24 came around, HYG was significantly lower than the S&P and you can see how that got resolved. Well, here we are again, with equity markets blissfully drifting higher while junk debt is getting creamed. I've tinted the disparity in green to demonstrate my point. If, not when, the two re-converge, it will be the S&P falling, not HYG rising. You may disagree, but I see far more bearish indications these days than bullish. So what does that mean for equity markets? Based on the chart above, it implies that the S&P has a date 120 points lower than current levels, or over 5%.