High Yield Caution

Friday iShares iBoxx $ High Yield Corporate Bond ETF (HYG) made a noticeable decline and after testing the August 2 high on September 1 it then turned lower. As one of our Foremost Indicators, the failure to continue higher at the previous high deserves some attention. There is more below including a put spread idea, but first a brief market review.

S&P 500 Index (SPX) 2461.43 slipped 15.12 points or -.61% for the week but remained above the 50-day moving average at 2454.90 after declining 18.70 points last Tuesday on geopolitical news from North Korea and then recovering Wednesday to make a small inside range day that began forming a possible symmetrical triangle continuation pattern.

CBOE Volatility Index® (VIX) 12.12 turned higher again gaining 1.99 points or -19.64% for the week while the comparable IVolatility Implied Volatility Index mean, IVXM increased 1.10 points or 15.58%.

Chart Courtesy of StockCharts.com

VIX Futures Premium

The chart below shows as our calculation of Larry McMillan’s day-weighted average between the first and second month futures contracts.

As the VIX advanced again the premium declined from the top of the range at 30.58% to 15.81% as September futures expiration approaches in 7 days when the futures will equal the VIX.

Friday’s Chart:

With 7 trading days until the September expiration, the day-weighted premium between September and October allocated 28 % to September and 72% to October for a positive 15.81% premium.

The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month future converges with the VIX at expiration.

iShares iBoxx $ High Yield Corporate Bond ETF (HYG) 87.79 declined .53 points or -.60% for the week after testing the previous August 2 intraday high of 88.35 on September 1 where it apparently also found resistance from the operative upward sloping trendline, USTL and turned lower.