Trade wars taking center stage this morning as cause for sell-off in futures…   S&P futures down -20pts right now (7:20) but up off the lows of the session… one factor behind the scenes however may be more telling of elevated volatility ahead: high yield credit markets.. junk typically acts as a leading indicator of equities and our gauge to track this area of the market has been selling off since the beginning of the year:

The Markit CDX North America Index is composed of 100 non-investment grade entities which roll every 6 months (white line)- this is charted against the S&P 500 above (yellow line)- in our last notable correction cycle (2015-2016) this index diverged away from equities to produce lower highs before crashing… we are seeing the setup for a similar divergence today. If this doesn’t recover we believe the U.S. equity markets may come under pressure in the weeks/months ahead.

So far our trading call remains on track: for May-June strength (U.S.) to be followed by increased volatility in second half of 2018, starting as early as July. Short-term tactical concerns remain the following (no particular order):

·         U.S. corporate earnings season

·         Trade / tariff war escalation

·         Recent China equity market decline (significant) and EM weakness- sell off on the VEU (global markets ex-the U.S.)

·         Stronger USD charts (safe haven trade)

·         Minor bearish top on 10-year yield (safe haven trade)

·         Yield curve close to inversion

·         Gold decline (liquidity concerns)

·         European bank stress

We think these factors (plus anything missed) could inject volatility into our U.S. equity market picture over the next 6 months, however we do not believe these will negate the secular cycle- which remains in reflationary expansion / growth mode for the next several years according to our model.

Continue to watch the 2650-2700 zone as initial support on the S&P 500. 2800 is now trading resistance over the short-run- this level was tested yesterday.

Dan Wantrobski, CMT
Director of Research | Technical Strategist
Janney Montgomery Scott, LLC