HYG, an equity ETF that represents high yield fixed income, is showing a very strong topping pattern that should make equity bulls sit up and take notice. To begin, HYG's momentum indicators (RSI and MACD) topped out six months ago and both have been making a series of lower highs and lower lows. Second, the market gave a monster clue in mid-November that something was very wrong with this market. Circled in the chart above, you will see two consecutive weeks where HYG spiked to all-time highs only to be smacked back down on elevated volume to close at weekly lows. Again, this is a HUGE warning. Institutional investors were using these two weeks as opportunities to unload HYG on momentum-chasing investors. The fact that the sellers overwhelmed buyers is extremely bearish. Lastly, trading volume has been increasing with each passing week as prices get hammered...not good.
You can plainly see how closely the two tracked each other from July 2013 through June 2014. This makes sense given the strength of the equity market over that time period. About six months, however, cracks began to form in HYG and the price began to falter. With the exception of the mini-crash in early October, the S&P has continued to march higher while market leading HYG has just gone lower, and lower, and lower.
Remember, CREDIT LEADS EQUITIES. This graph implies that the S&P has significant catching down to do to re-correlate with HYG. While we're seeing some weakness in the markets today, I believe we have a long way to go still, assuming the high yield credit market is telling the truth. As I've said many times before, now is not the time to get long equities for the average investor. Caution is advised.