The Weight

Watch the load

Let’s make one thing clear right at the top. The definitive version of The Weight has The Band joined by Pop Staples and the Staple Singers in a scene from The Last Waltz. There simply can be no disagreement on this.

As I was doing the usual weekend review today, it struck me that markets are carrying a lot of weight these days. It reminded me of how ol’ Luke is waitin’ on the Judgment Day. And he’s resigned to a bad outcome when he asks his friend to take care of Miss Anna Lee. Luke is gonna carry the weight.

We assessed one source of the load yesterday when we looked at the bad breadth measured by the McClellan Summation Index. Today we will revisit an old favorite: the high yield credit market. As you can see below, the bearish divergence that we pointed out not long ago has pretty much fallen off a cliff. Rising interest rates are the obvious culprit causing traders to sell more bonds than they’re buying.

And we don’t need to go all the way back to the GFC to notice that this kind of divergence can be a harbinger of bad times for equity markets.

But maybe Luke is stronger than we think. After all, the VIX Mix is not stressed at the moment having finished the week toward the upper end of the neutral zone with four bullish components and only one in the red.

Not to mention the fact that the trend line is pointing north as the trailing 10-day moving average sheds those red bars from the beginning of last week.

A snapshot of the CBOE volatility term structure confirms a “risk-on” configuration with almost nine points of contango from VIX9D out to VIX1Y.

And if we take a snapshot of the spread between VIX6M and VIX, we are hovering around the five-point mark that reinforces a picture of good health in the volatility complex.

Adding up all the pluses and minuses, old Luke may be headed to Judgment Day but he is managing to carry the weight for now. Divergences can be resolved without bad outcomes. But some resolution is necessary. It’s a good time to be paying attention to make sure the weight don’t fall on you.

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