Wednesday, February 15, 2012

Treasuries

The market saw some selling pressure today with the DOW down 97+ points but the broader indices did not sustain as much damage.  So far, we're experiencing a "garden variety" correction. 

We've been watching commodities and Treasuries closely for confirmation of the strength we've been seeing in stocks since the beginning of the year.  Commodities have not been confirming the move in stocks and neither have Treasuries. But Treasuries, in my opinion, are getting close. 

We'll be taking another look at the Treasury market today with a focus on the inter-market relationships which have been driving these markets for the past few years. 

The intermarket relationships that predominate are:
If Stocks                              rally                       correct
Then Treasuries              will correct              will rally
Then Gold                        will rally                   will correct
Then Commodities          will rally                  will correct
Then US Dollar                will correct               will rally
With that said, here's a weekly chart of the iShares Barclay 20+ Year Treasury Bond Fund (TLT), a proxy for the long end of the Treasury yield curve, going back four years (double click on the chart for a larger image):

Notice the consolidation triangle (purple dashed lines) and how the ETF has been starting to rollover in the past 10 weeks.  The MACD momentum indicator on the top panel is giving a definitive bearish signal.

The three panels below the price chart show correlations between TLT and the S&P 500, the Goldman Sachs Industrial Commodity Index and Gold.  For the most part these correlations are consistent with our inter market relationships but I've highlighted the tension that's building with the S&P correlation.  This tension has to be resolved.  Either Treasuries will resume their uptrend and stocks will weaken or the rally in stocks will continue and Treasuries will breakdown out of the consolidation triangle (red arrow).  And the MACD indicator is giving us a signal which way Treasuries are likely to go ...

Questions anyone?