An Update on a few Obscure and Not-So Obscure Indicators
We recently discussed the market with our friend T.R. (inventor of the proprietary Au-Ag ratio adjusted VIX indicator) and he sent us a few charts of the things he is watching. While he’s not a long term bear, he does think there is sufficient evidence to warrant caution – i.e., a bigger correction may be about to get underway. This jibes with what we have been seeing lately in terms of sentiment extremes.
Note that these charts are by now three trading days old, but that doesn’t make a big difference – although the stock market has had a few bad hair days last week, it hasn’t really made a big move yet. The annotations on the charts are T.R.’s, and mainly serve as orientation. Regular readers may recall that we showed some of these charts fairly regularly at the time of the euro area debt crisis. Many of them haven’t really been all that interesting up until recently, but that has now changed.
The first chart shows the SPX, the Junk/Investment grade debt ratio and the SPX adjusted by volatility and the gold-silver ratio. The vertical white lines show the historical peaks of the margin debt/GDP ratio
SPX in green, junk-investment grade debt ratio in yellow, VIX/Au-Ag ratio adjusted SPX in orange. The white vertical lines show margin debt/GDP peaks, which tend to lead market peaks (the current lead time has been historically quite extended) – click to enlarge.
The next chart shows the Barcap high yield spread index (a measure of credit love and revulsion) vs. the MSCI emerging markets index. As you can see, the latter has been rejected at resistance just as the former has begun to rise. It is also noteworthy that during the time spreads were declining, EMs have failed to rally (which is contrary to last time around). Something is not the way it “should†be.
Barcap HY spread index vs. MSCI emerging markets index – click to enlarge.
