Credit Flow Investor

Risk off TLT to Oil on the macd shows momentum now returning to the upside.  The recent momentum down was less than last year. This means risk off will be stronger this year. Oil will stall out and fall in Feb-Mar. Although I still expect SPY to rise 8-10% for the year.

The oil macd weekly needs the 12 week (red) X the 26 week (black). It’s approx a 18-24mo cycle..

See below that the USD from (Oct-on) won’t be helping oil to stay up as in 2017.

1.    The USD falling from Jan to Sep was a big boost to SPY returns hence

no pullbacks in  2017.

USD has turned up since Nov 28 with the Fed’s comments:

Now we know ccpi will be 2.0 in 2018.

When in Fed raising mode, CCPI > 2.0 leads to Fed tightening policies. 2016 is a guide with many vix events. As well, now that vix has bottomed, it has no where to go but up.

Factors favorable to SPY in 2017 (in addition to expected tax cuts):

1. After election year
2. After March, ccpi below 2.0 leads to returns speeding up and less vix events
3. USD falling most of 2017 due to ECB expected taper and ccpi above
4. Oil generally above the 40wkma except for May-Aug

Next year 2018 less favorable:

1. Year after surge +20% means SPY can rise up to +10%
2. CCPI will be above 2.0 for the year which leads to lower returns and more vix events (2016)
3. Fed continues to raise rates in 2018 bolstering USD  (flat to rising)
4. Oil losing momentum and falling from May-Jun as USD no longer supporting it

Credit cards are the ‘canary in the coal mine’ for the economy and overall delinquencies. Below is the rate of change in delinquencies (an early indicator).

It is fairly noisy but is the first loan item to go delinquent.

And the overall level is below. (5% seems to be the crossover point)

They are rising but aren’t near 5% yet! Hence, 2020 is the year for the crossover.

Below is a table showing the VIX 20+ events per year:

Note 2017 has had low VIX, low inflation (CCPI), and the year after election in its favor.  It loses 2 next year. Oil usually falls in the year after a surge. The year after a surge scales down into 2019 with a 1% year.

As the crisis onsets, the pullbacks and corrections (ROC14) get bigger as VIX rises:

Mar 2007   -5%

Jul 2007   -6%

Nov 2007  -7%

Jan 2008   -12%

Oct 2008   -32%

And as seen below, VIX crises after holidays:

June (sometimes), Oct, and Jan:

And since 2015, they come in waves of VIX 20 here as well see Aug 2015 followed by Jan 2016:

With CCPI on the rise, is a 1y long term TLT hold policy wise?  CCPI has been falling for 7 months but is now on the rise. Also monthly ccpi now 0.22 or 2.69% annualized. Average ccpi for 2017 has been 1.90%. This implies an upward trend in inflation now.

Below is monthly ccpi:

Let’s see..yearly CCPI and TLT YoY ROC:

Results

Yearly results summarized:

As you can see, if ccpi is above 2.0, TLT has a poor yearly return (-1% 2012, 2016 0%). 2012 is shown only in the table. SPY is eligible for 10% corrections however when ccpi is 2.0 in Sep-Oct and Jan. Also VIX tends to rise with ccpi above 2.0.

TLT YoY return next year will be low -1% or 0%.

BUT now that ccpi is rising:

1. CCPI will rise above 2.0
2. Fed will threaten more rate rises
3. VIX will move up to 12.5
4. Oil will start fall Jun-Aug
5. VIX 20 / ROC -4% Jun-Jul
6. Sep-Oct fall this year -7% (raises VIX) followed by -10% in Jan

Unless VIX hits 20 in December, it will take time to build up risk off conditions (the above 10wkma line needs to move upwards).  BUT VIX has started to move up to a 12 base line launching into a risk off in Sep-Oct.

Vix will rise to a base of 12 next year 15 wkma (week moving average).