Today’s chart highlights where markets sit in the context of recent volatility, but very distant memories. The focus is High Yield Credit.

High Yield credit should always be consulted to determine the health of the economy and where markets are leading.  Right now we are concerned with high yield as we approach major support levels.  Remember an economy that is growing even with higher rates can support high yield.  An economy that may not be as firm as has been priced in, or one that could be under attack from the Fed who has to “normalize” may show signs of breaking down.  As I have been known to say in markets, “the bond market is smarter(than the equity market)”.

Oil was the catalyst to meltdown across asset classes that began in July 2014 and crescendo in February 2016.  Because of the nature of the energy industry and the highly leveraged(high growth) players who transformed the US energy industry, as high yield credit fell was the impact was circular and self-feeding. As credit spreads widened and oil prices dropped more, and vice versa.

Today, we are in a situation where oil prices (clinging to major support as well)  are adding to the pressure on asset prices.  Add in chaos within the Republican Party and White House and investors must grapple with how much growth we could actually see in the next 12 to 18 months versus what markets have priced in.  Despite high levels of Business and Consumer Confidence, credit could quickly reverse as other factors unleash market forces that are difficult to stop.

The attached chart gives you the set up for today’s levels where the HYG (High Yield ETF) is clinging to major support.  The break of high-yield in the summer of 2014 led to a massive selloff in Banks, Oil, EM, and broader markets.  The chart illustrates where we now at the only second test of the 200d on the $HYG ETF and failure to hold $85.00 on the downside will be a signal for a broader pullback.


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