Continuing divergence between credit and stocks

The stocks made new all time high today on thin volume but credit continues in other direction. The credit spread has  moved opposite of stocks all year:

To understand why this is important, see "Why credit spread matters". 

In a more near term movement, 10 year treasury price has made a strong move up:

Similar move preceded the October price stock market down move. SKEW remains elevated (SKEW>135 for third time in four days). I do not expect much to happen on Friday's short trading day but the next big move should be down.

Another up week with weakening breath

Looking at SP500 price action, this week was another strong up week. Momentum was fading a bit but irrelevant Chinese interest rate news  drove the market up on Friday. The gap up ended in doji in many indexes (see for SOXX example below) sets up potential for reversal on Monday.

Figure 1: Gap up and doji. Exhaustion?

Is this the exhaustion that marks the market reversal? Next weeks will tell. Meanwhile, here are some clues:

1. Skew > 135 for both Thursday and Friday. Historically this has meant high risk for correction.

2. Even with this week rally in large caps, market breath is weak.

Figure 2: Breath is weak.

3. Defensive sectors are still leading.

Figure 3: Defensive stocks stronger than cyclicals.

4. Oscillators are starting to roll over. This is too already to call. Typically, the oscillators will need to turn negative before an air pocket. But given the nervousness in the market, fast drops cannot be ruled out.

Figure 4: McCellan and MACD are starting to roll over.

Overall, we have a strong set-up for reversal in next few weeks.