Monday, February 22, 2016

SPX and HYG:TLT: Still an Uninspiring Market

Something I've tracked regularly for the past few years is the ratio of HYG:TLT.  TLT is the iShares 20+ Year Treasury Bond ETF, while HYG is the iShares iBoxx High Yield Corporate Bond ETF (HY obviously stands for "High Yield," but there's no indication anywhere as to what the "G" stands for -- so my personal theory is that HYG stands for "High Yield Garbage").  I track this ratio because, theoretically, it should help give warning when smart money is moving from risk into perceived safety, and vice-versa.

In practice, this ratio flashed early warnings throughout 2014 -- but it wasn't until early-2015 that I felt (and wrote) that it was "finally... time for equities to pay the piper, and reconcile this divergence with a downward correction."  Given what's happened since, I believe we can safely say the theory worked quite well.

With that little bit of background, let's update where HYG:TLT stands today.  We can see that, as of this moment anyway, bulls appear to have their work cut out for them.  There's simply nothing intermediate bullish about this pattern -- although, for the near-term, a back-test of the broken black support line wouldn't be terribly surprising:

From an intermediate standpoint, nothing has changed, and I still expect we've got lower prices pending.  From a near-term standpoint, nothing has really changed either, and the near-term remains ambiguous.

Despite that, I've taken a look at the charts with fresh eyes this weekend, and decided to step out onto a limb that probably can't support my weight.  Just be aware that the target shown below is not my usual type of "higher confidence" target, and more of a zone to watch carefully if we reach it:

In conclusion, the intermediate-term remains bearish in appearance, while the near-term remains ambiguous.  Regular readers will recall that I've felt the near-term appeared ambiguous for the past four weeks (starting on January 21, immediately after SPX captured its downside targets) -- and, in fact, the market has remained range-bound ever since.  The market generally oscillates between trending waves and cycling waves, and sometimes about the best you can do is simply identify when it shifts from one phase to the other.

From a near-term perspective, we're still below the wave (2) invalidation level, so the market has kept open the most immediately-bearish options for the time being.  Essentially, nothing has changed since Thursday:  If we see an impulsive turn from here, then we'll have our first clue; if we don't, then the pattern calls for continued patience for bears. 

Frankly, I'm growing a bit tired of charting this wave of the past four weeks, but it is what it is.  As I see it, the pattern is most-likely a bull trap -- just be aware that sometimes in order to be a good bull trap (and bear killer), a wave needs to run higher and longer than seems reasonable.  I genuinely don't know if that's what will happen here or not, which is why I'm still awaiting a clear impulsive decline.  Trade safe.

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