10-year Treasury Yield (TNX) and 30-year Treasury Bond (TLT) Update

0-year Treasury yields have been the ‘talk of the town’ lately. Many market commentators consider 10-year rates the linchpin for continued equity gains and scapegoat for lack thereof. 

Here is the near-term outlook for 10-year Treasury yields and 30-year Treasury Bonds as published in Sunday’s Profit Radar Report (charts have not been updated, but price has moved in the expected direction).

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Business Daily says: “When Simon says, the market listens.”  Find out why Barron’s and IBD endorse Simon Maierhofer’s Profit Radar Report

30-year Treasury Bonds (TLT) Outlook

The daily chart (end of day prices only) pegs 30-year Treasury Futures at a general support zone (extending slightly above and below the green trend line) and just below trend channel support. There is a bullish RSI-35 divergence with RSI-2 nearly over-sold.

The wave structure since the March 2020 high is not without dispute, but the persistence of the latest decline suggests this is a wave 3 (or C) decline. A bounce (either wave 4 or something more sustainable) could start from around the current support range.

The structure for the iShares 20+ Year Treasury Bond ETF (TLT) looks similar.

A detailed long-term outlook for 30 year Treasury bonds was published in the March 21, 2021 Profit Radar Report.

10-year Treasury Yield Index (TNX) Outlook

TNX (10-yr Treasury Yield Index) closed right at double resistance last week. RSI-2 is nearly over-bought and RSI-35 shows a bearish divergence. Up side momentum has been strong and betting on a reversal takes perfect timing, but the odds for a (temporary) reversal (perhaps wave 4) are higher than at any other point over the past few months.

Below is a list of ETFs linked to 10-year Treasury bonds. Keep in mind that there is an inverse relationship between bond prices and yields. Anyone betting on lower 10-year yields would want to be long 10-year Treasuries while anyone betting on a continued rise in yields would want to own an inverse 10-year Treasury ETF (like TBX, PST, TYO).

iShares 7-10 Year Treasury Bond ETF (IEF)

ProShares Short 7-10 Year Treasury ETF (TBX)

ProShares Ultra 7-10 Year Treasury ETF (UST)

UltraShort Barclays 7-10 Year Treasury ETF (PST

Direxion Daily 7-10 Year Treasury Bull 3X (TYD)

Direxion Daily 7-10 Year Treasury Bear 3X (TYO)

Continuous updates are available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s evaluation of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. 

Follow Simon on Twitter @iSPYETF or sign up for the FREE iSPYETF e-Newsletter to get actionable ETF trade ideas delivered for free.

US Treasury bonds and notes have been range bound for over six months.

There is reason to believe that Treasuries, especially 30-year Treasuries bonds, will soon break higher. Why?

Smart Money

Commercial hedgers – a group of traders considered the ‘smart money’ – are buying Treasuries across the bond curve in anticipation of higher prices.

The chart below shows commercial hedgers’ aggregate net exposure to 5, 10, 30-year Treasuries (blue graph).

As the green arrows show, hedgers’ bullish bets are generally vindicated by a period of rising prices.

Below is a list of ETFs likely to benefit from the bullish developments seen by commercial hedgers. Long-term maturities are more dynamic and subject to bigger price moves.

  • iShares Short Treasury Bond ETF (NYSEArca: SHV)
  • iShares 1-3 Year Treasury Bond ETF (NYSEArca: SHY)
  • iShares 3-7 Year Treasury Bond ETF (NYSEArca: IEI)
  • iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF)
  • iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT)

Seasonality

The green chart insert shows that seasonality is generally bullish for the remainder of the year.

A move above the red resistance lines is necessary to unlock an up side target of 129 – 133. This up side target is based on Fibonacci retracement levels (50% and 61.8%) and an open chart gap.

Sustained trade below 120 would put any rally on hold.

Above analysis was initially published in the August 26 Profit Radar Report. Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Business Daily says: “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s profile of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Stock/Bond Ratio Projects Exciting Times Ahead

Are stocks ripe for a deeper correction or is the 5%+ January hiccup – the biggest in well over a year – already in the rearview mirror? The stock/bond ratio provides a dimension not often considered.

The S&P 500 (SNP: ^GSPC) just had its first 5%+ correction in well over a year.

Some say that’s bullish, because it brought prices down to levels that spark new buying. Others point to a potentially bearish technical breakdown at a time when stocks are over-loved, over-valued, and over-hyped.

Which one is true?

As the old saying goes, there are always three sides to an argument: His, hers and the truth.

The stock/bond ratio provides another dimension to this ‘argument.’

We use the SPDR S&P 500 ETF (NYSEArca: SPY) as proxy for stocks and the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) as proxy for bonds.

The S&P 500 ETF – SPY/IEF ratio chart below shows the SPY/IEF ratio vacillating between support and resistance.

The SPY/IEF ratio rises when the S&P 500 moves higher and bonds move lower.

A spike in the SPY/IEF ratio accompanied every S&P 500 high. This includes the most recent January high.

However, the SPY/IEF ratio did not touch resistance at the most recent high. It also didn’t touch support at the most recent low.

Nothing says that resistance or support need to be met, but often such support/resistance levels act as magnets.

If the SPY/IEF ratio is still in need of touching both support and resistance levels, as a result, we conclude that the January high didn’t mark a major top and last week’s low didn’t mark the end of this correction.

Obviously, this would translate into exciting times ahead.

A detailed forecast for the S&P 500 is provided here:

S&P 500 Forecast: Short-Term Gains vs Long-Term Pain

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Fed Needs Help of its Worst Enemy to Unload QE Assets

Talk about a classic catch 22. The Federal Reserve has been buying Treasuries to depress interest rates and spark the economy. With a bloated balance sheet, the Fed needs the help of its arch enemy to unload assets.

1,273%. That’s how much the Federal Reserve’s balance sheet has mushroomed since 1990.

As of January 22, the Federal Reserve owns $2.228 trillion worth of U.S. Treasuries and $1.532 trillion worth of mortgage-backed securities.

Various other holdings bring the Fed’s balance sheet to $3.815 trillion.

The chart below provides a visual of the sharp balance sheet increase since 2008.

Buying those assets is the easy part, but how will the Fed unload them?

The Fed’s Enemy – Who?

The Federal Reserve engaged in massive quantitative easing (QE) to depress interest rates. Low interest rates forced investors into stocks and defrosted the frozen credit markets.

By extension, QE drove up stock indexes like the S&P 500 and Dow Jones (NYSEArca: DIA). Bernanke termed this the ‘wealth effect,’ which the Fed hoped would spill over into the economy.

The Fed’s biggest enemy is interest rates, rising interest rates to be exact. Particularly important is the 10-year T-note yield.

Rising interest rates make Treasuries and Treasury Bond ETFs like the iShares 20+ Year Treasury ETF (NYSEArca: TLT) more attractive than stocks.

Rising interest rates also result in higher loan and mortgage rates, which are speed bumps for the economy and real estate.

The chart below, published on December 12, plots the S&P 500 against the Fed’s balance sheet and 10-year Treasury Yields. Yields are inverted and the chart shows that the Fed has lost control over yields.

How The Fed’s Arch Enemy Can Help

The Federal Reserve is the biggest buyer and owner of Treasuries. The Fed can print money and buy securities all day long.

But, who will end up buying all the Treasuries the Federal Reserve has amassed? What happens when the Fed becomes the seller? The Fed can’t print buyers. There has to be a demand or the Fed (if possible) has to create a demand.

Irony at its Best

What makes Treasuries attractive? High yields, which ironically is exactly what the Fed is trying to avoid. High yields are bad for stocks and bad for the economy, but may be the Fed’s only hope to eventually unload assets.

There’s another caveat. High yields translate into lower prices. As yields rise, the Fed’s Treasury holdings – and Treasury ETFs like the iShares 7-10 Year Treasury ETF (NYSEArca: IEF) – will shrink.

Are there other alternatives? How about doing nothing and let the free market do its thing. Perhaps that’s what Bernanke and his inkjets should have done all along.

There is another problem largely unrelated to QE and the Federal Reserve. It’s ownership of U.S. assets (not just Treasuries).

We know that the Federal Reserve owns much of the Treasury float, but more and more U.S. assets are falling into the hands of foreigners. More and more U.S. citizens have to ‘pay rent’ to overseas landlords.

Here’s a detailed look at this economically dangerous development:

US Assets are Falling into the Hands of Foreign Owners at a Record Pace

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Most Important Number in Finance is Slipping Out of the Fed’s Control

The Federal Reserve is the most powerful financial institution in the world and yet it is like the emperor without clothes. Ironically, the very force the Federal Reserve is most afraid of may be the only thing to save the Treasury.

Mirror mirror on the wall, what is the most powerful financial institution of them all?

The S&P 500, Dow Jones and pretty much all other markets seem to dance to the tune of the QE rhythm … and yet the Federal Reserve resembles the vain king portrayed in Christian Andersen’s “The Emperor’s New Clothes.” How so?

Rogue Interest Rates

The chart below shows the Federal Reserve’s monetary base sandwiched by the S&P 500 (SNP: ^GSCP) and the inverted 10-year Treasury Yield (Chicago Options: ^TNX).

The purpose of the chart is to show QE’s effect (or lack thereof) on stocks (represented by the S&P 500) and bonds (represented by the 10-year Treasury yield).

The 10-year Treasury yield has been inverted to express the correlation better.

I’ll leave the big picture interpretation of the chart up to the reader, but I have to address the elephant in the room.

Since the Federal Reserve stepped up its bond buying in January, the 10-year yield hasn’t responded as it ‘should’ and that’s very odd (the chart below shows the actual 10-year yield performance along with forecasts provided by the Profit Radar Report).

As of December 5, 2013, the Federal Reserve literally owns 12% of all U.S. Treasury securities and by some estimates 30% of 10-year Treasuries.

Icahn More Powerful Than Fed?

The Federal Reserve basically keeps jumping into the Treasury liquidity pool without even making a splash. If Carl Icahn can allegedly drive up Apple shares (with a 0.5% stake), why can’t the Fed manipulate interest rates at will?  This is just one of the many phenomena that makes investing interesting and keeps the financial media in business.

Conclusion

We do know why the Fed wants low interest rates. Rising yields translate into higher mortgage rates, and a drag on real estate prices. Eventually higher yields make Treasury Bonds (NYSEArca: IEF) a more attractive investment compared to the S&P 500 (NYSEArca: SPY) and stocks in general.

Ironically, what the Fed is trying to avoid (higher yields) may be the only force to save the U.S. Treasury. How can the Federal Reserve ever unload its ginormous Treasury position without the help of rising interest rates?

The emperor without clothes maintained his dignity (at least in his mind) as long as everyone pretended to admire his imaginary outfit. Perhaps a market wide realization that the Federal Reserve isn’t as powerful as it seems may ‘undress the scam.’

Regardless, the Fed’s exit from bonds would likely be at the expense of stocks, a market the Federal Reserve has been able to manipulate more effectively than bonds.

The Federal Reserve owns 12 – 30% of the U.S. Treasury market, but how much of the U.S. stock market has the Federal Reserve financed?

This stunning thought is explored here: Federal Reserve ‘Financed’ XX% of all U.S. Stock Purchases

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. We are accountable for our work, because we track every recommendation (see track record below).

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Most Important Number in Finance is Slipping Out of the Fed’s Control

The Federal Reserve is the most powerful financial institution in the world and yet it is like the emperor without clothes. Ironically, the very force the Federal Reserve is most afraid of may be the only thing to save the Treasury.

Mirror mirror on the wall, what is the most powerful financial institution of them all?

The S&P 500, Dow Jones and pretty much all other markets seem to dance to the tune of the QE rhythm … and yet the Federal Reserve resembles the vain king portrayed in Christian Andersen’s “The Emperor’s New Clothes.” How so?

Rogue Interest Rates

The chart below shows the Federal Reserve’s monetary base sandwiched by the S&P 500 and the inverted 10-year Treasury Yield (Chicago Options: ^TNX).

The purpose of the chart is to show QE’s effect (or lack thereof) on stocks (represented by the S&P 500) and bonds (represented by the 10-year Treasury yield).

The 10-year Treasury yield has been inverted to express the correlation better.

I’ll leave the big picture interpretation of the chart up to the reader, but I have to address the elephant in the room.

Since the Federal Reserve stepped up its bond buying in January, the 10-year yield hasn’t responded as it ‘should’ and that’s very odd (the chart below shows the actual 10-year yield performance along with forecasts provided by the Profit Radar Report).

As of December 5, 2013, the Federal Reserve literally owns 12% of all U.S. Treasury securities and by some estimates 30% of 10-year Treasuries.

Icahn More Powerful Than Fed?

The Federal Reserve basically keeps jumping into the Treasury liquidity pool without even making a splash. If Carl Icahn can allegedly drive up Apple shares (with a 0.5% stake), why can’t the Fed manipulate interest rates at will?  This is just one of the many phenomena that makes investing interesting and keeps the financial media in business.

Conclusion

We do know why the Fed wants low interest rates. Rising yields translate into higher mortgage rates, and a drag on real estate prices. Eventually higher yields make Treasury Bonds (NYSEArca: IEF) a more attractive investment compared to the S&P 500 (NYSEArca: SPY) and stocks in general.

Ironically, what the Fed is trying to avoid (higher yields) may be the only force to save the U.S. Treasury. How can the Federal Reserve ever unload its ginormous Treasury position without the help of rising interest rates?

The emperor without clothes maintained his dignity (at least in his mind) as long as everyone pretended to admire his imaginary outfit. Perhaps a market wide realization that the Federal Reserve isn’t as powerful as it seems may ‘undress the scam.’

Regardless, the Fed’s exit from bonds would likely be at the expense of stocks, a market the Federal Reserve has been able to manipulate more effectively than bonds.

The Federal Reserve owns 12 – 30% of the U.S. Treasury market, but how much of the U.S. stock market has the Federal Reserve financed?

This stunning thought is explored here: Federal Reserve ‘Financed’ XX% of all U.S. Stock Purchases

Simon Maierhofer is the publisher of the Profit Radar ReportThe Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. We are accountable for our work, because we track every recommendation (see track record below).

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Bond / S&P 500 Ratio Suggests Bonds Are Undervalued

Boring or exciting, tortoise or hare, bonds or stocks? There are different ways to figure out when to overweigh stocks over bonds or vice versa. This indicator shows the value of bonds relative to the S&P 500 Index.

Boring or exciting, tortoise or hare, bonds or stocks?

A low interest rate environment generally favors stocks as investors flee from fixed-income vehicles into higher-octane stocks.

This has been a winning strategy. The SPDR S&P 500 ETF (NYSEArca: SPY) is up 25%, compared to a 3% loss for the iShares Barclays 7 – 10 year Treasury Bond ETF (NYSEArca: IEF).

However, one indicator suggests that 10-year Treasury bonds are about to catch a bid.

The indicator is the ratio between the S&P 500 Index (SNP: ^GSPC) and the iShares Barclays 7 – 10 Year Treasury Bond ETF (IEF).

The chart below plots IEF against the S&P 500 : IEF ratio.

The red arrows highlight extremes in the S&P 500 : IEF ratio. More often than not an extreme in the ratio has coincided with lows for IEF and Treasury bonds in general, which includes the iShares Barclays 20+ Year Treasury ETF (NYSEArca: TLT).

The S&P 500 ETF : IEF ratio as a bullish indicator for Treasury Bonds however, is in conflict with our technical analysis for the 10-year Treasury Note yield.

The longer-term trajectory for the 10-year rate seems to be up.

The second chart of the 10-year Treasury Note yield (Chicago Options: ^TNX) shows that yields have broken above a short-term resistance trend line, which seems to put yields on track to surpass their September high (see chart annotations for previous Profit Radar Report analysis).

In an ideal world all indicators always point in the same direction, but when is market analysis ever ideal? It even takes some hindsight to pinpoint actual ratio extremes highlighted above.

The indicators may be telling us that there’s some short-term weakness for bond yields followed by a period of rising 10- year yields (with a target above 3%).

Does the S&P 500 : IEF ratio also apply to the S&P 500 Index?

A chart that plots the S&P 500 against the S&P 500 : IEF ratio can be found here. Although the chart isn’t failproof, it sends a message that shouldn’t be ignored. View S&P 500 vs S&P 500 : IEF ratio chart here.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report uses technical analysis, dozens of investor sentiment gauges, seasonal patterns and a healthy portion of common sense to spot low-risk, high probability trades (see track record below).

Follow Simon on Twitter @ iSPYETF or sign up for the iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

 

S&P 500/Bond Ratio Shows Stocks are Overvalued

Much has been written about the ‘great rotation’ from bonds into stocks. In reality, investors ask themselves every day if there’s more value in stocks or bonds. There’s one accurate measure to determine where’s more value.

Stocks or bonds? Essentially that’s a decision investors make every day.

As with pretty much every other purchase, investors want to get the biggest bang for their buck and avoid risk. In other words, risk/reward is key.

What’s the better risk/reward play right now? Stocks or bonds?

To find out we will take a look at the value of the S&P 500 Index relative to 10-year Treasury prices. The iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) is used as proxy for 10-year Treasuries.

The chart below plots the S&P 500 Index against a ratio attained by dividing the S&P 500 against the price of IEF (S&P 500:IEF).

This is one of the easiest and most effective ways to determine the value of both asset classes relative to each other.

The chart shows that S&P 500:IEF ratio extremes put the kibosh on stocks every time. The degree of the correction varied, but the direction for the S&P 500 was the same every time – down.

There is one problem though.

It usually takes hindsight to determine what constitutes an S&P 500:IEF ratio extreme.

The ratio, although extreme right now, could become more stretched. Will it?

The dashed horizontal gray line shows today’s ratio in correlation to prior readings. In fact, the ratio is at a point where it turned down in early 2007 and early 2008. This appears as natural resistance for the ratio … and the S&P 500.

The S&P 500:IEF ratio suggests that risk is increasing for the S&P 500.

This harmonizes with the S&P 500 chart, which conveys the message that stocks are at a short-term inflection point. This article highlights some technical ‘speed bumps’ most investors aren’t aware of: What’s Next For the S&P 500?

 

The Most Important Number in Finance is Falling … For Now

What’s the most important number in the financial world? You could ask Congress … but of course they couldn’t agree on it. The most important number in finance pulls almost every financial market in its wake. One more hint: The Federal Reserve (thinks it) is in control of it.

What is the most important number in finance?

GDP, unemployment rate, consumer confidence, or CPI?

The most important number in finance is the 10-year US Treasury Yield (Chicago Options: ^TNX).

When this number changes, almost every other number in finance changes.

The 10-year yield nearly doubled since May. The 7-10 Year Treasury Bond ETF (NYSEArca: IEF) dropped as much as 10%, a huge move for Treasury Bonds. The iShares Barclays 20+ Treasury Bond (NYSEArca: TLT) fell as much as 16%.

With rising yields came higher mortgage rates. But it doesn’t stop there. The yield rally also stifled stocks’ performance in two ways:

1) Low interest rates make bonds less attractive to investors and force them to move into stocks (NYSEArca: VTI). Bernanke calls this much-desired side effect the ‘wealth effect’ (although it robs retirees of their income).

2) Rising interest rates cause higher loan rates for businesses. This puts a squeeze on the profit margin and ultimately the stock price.

Yes, the 10-year yield is arguably the most important number in finance and therefore the chief target of Bernanke’s QE programs. The Federal Reserve buys its own Treasury bonds in an attempt to drive interest rates lower.

In the financial heist game it’s called an inside job.

Ironic QE Revenge

Ironically for much of 2013, the 10-year yield has been revolting against its puppet master (the Fed). The almost unprecedented 2013 yield rally is the opposite of the Fed’s objective.

The chart below plots the S&P 500 against the 10-year Treasury Yield.

1) The green box highlights the unwanted, unexpected and unprecedented yield rally.

2) The solid red lines marks yield resistance mentioned by the September 8 Profit Radar Report: “Yields have been rising dramatically, but may be at or near a top (at least a temporary one). As long as yields stay below 3%, odds are starting to favor falling yields and rising Treasury prices.”

Yields tumbled as much as 12% since.

3) The dashed red line shows what the S&P 500 (NYSEArca: SPY) has done since the meteoric yield rally: The S&P 500 is essentially flat and has been range bound since May. Apparently QE money is still finding its way into stocks, but rising yields prevented further gains for stocks.

4) A closer look at the correlation shows that rising yields are not always bad for stocks and shouldn’t be used as a short-term indicator.

Yield Outlook

The long-term trend for the 10-year yields seems to have changed from down to up. Over the short-term, yield may drop a bit further to digest the recent rally.

As the U.S. politicians are ‘impressively’ demonstrating (debt ceiling battle), U.S. Treasuries are not without risk. Even if/once an agreement is hammered out, the long-term futures for Treasuries doesn’t look bright.

As mentioned earlier, the Federal Reserve is deliberately inflating Treasuries. At one point the much-feared taper will begin. Via a brilliant preemptive move – probably in an effort to deflect responsibility – the Federal Reserve has already warned of a market crash (not caused by the taper of course). More details about the Fed’s market crash warning can be found here:

Surprising Fed Study – Is it Warning of a Market Crash?

Simon Maierhofer is the publisher of the Profit Radar Report.

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Stock/Bond Ratio Shows ‘Bullish Confidence Breakout’

Stocks are up and so are bonds. That’s unusual because the ‘risk on’ and ‘risk off’ trade usually alternate not coexist. There’s a battle going on and the featured chart shows who’s winning the tug of war between fear and confidence.

To some degree investing is always a battle between confidence and fear. Confident investors buy stocks, fearful investors buy bonds.

As of late, schizophrenia seems to have entered the investment world. Investors are buying both bonds and stocks. What does that mean?

The first chart shows that stocks and bonds have been moving higher in tandem. We use the SPDR S&P 500 ETF (SPY) as proxy for stocks and the iShares Barclays 7-10 Year Treasury ETF (IEF) as proxy for bonds.

The kind of ‘hand-in-hand’ performance is unusual for two inversely related asset classes. To break the fear/confidence tie, it may help to take a look at the performance of stocks relative to bonds – the SPY:IEF ratio.

When the ratio is rising, stocks are in higher demand relative to bonds and when the ratio is falling bonds are in higher demand relative to stocks.

The second chart plots SPY against the SPY:IEF ratio (SPY divided by IEF). Here are the three key points:

  • The SPY:IEF ratio has struggled to overcome resistance, but today shows an intraday bullish breakout.
  • Some caution is warranted as previous SPY:IEF readings around 1.45 appeared near price highs for stocks.

 

Using the SPY:IEF ratio as a barometer for stocks we can draw the following conclusions:

  • If today’s bullish breakout holds, the SPY:IEF ratio points towards higher prices
  • The ratio is in danger territory. Stop-loss levels should be used to manage the increasing risk of long positions