The Battle of Stocks vs. Corporate Bonds

I hope you all are having a good week. While I haven’t been posting very many charts on the blog, I have been a little more active on getting them out on twitter and stocktwits.

Well it seems Mr. Market has been able to regain the important 1600 level in the S&P ($SPX), likely giving a little confidence boost to equity bulls. Things also appear to be fairly strong morning as the e-minis hit higher highs before the opening bell. As stocks regain their footing I wanted to bring up this ratio chart of S&P 500 SPDRs ($SPY) and the iShares Investment Grade Corp. Bond ETF ($LQD). During the short correction we saw bonds tumble right alongside equities, which is something we don’t see happen very often. During the month of June we can see in the chart below, $SPY has been trekking higher, slowly hitting higher highs in relative performance against its bond buddy $LQD. However, it’s not all roses and sunshine as we can see in the top panel. The Relative Strength Index (tired of me talking about the RSI yet??) has been diverging – hitting lower highs.

So we have an interesting setup taking place. I’ve put in some rough trend lines on both the momentum indicator as well as the ratio of stocks vs. investment grade bonds. Going forward we will see if RSI can breakout from its falling trend line, restoring confidence in equities outperformance of corp. bonds. In a ‘normal’ market, something like this would be a warning flag to a continued ‘risk on’ rally, but with the potential changes in Fed action many traders are beginning to wonder – is this time different? We shall see.

spy lqd

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Canada Continues To Underperform U.S. Equities

Well stocks continue their slide. While U.S. equities are in the red, globally there are some markets that are fairing a little worse than ours. In my TraderPlanet post for this week I compare Canada’s equity market ($EWC) to $SPY.

A piece:

The chart below shows the relationship between iShares Canada ($EWC) and S&P 500 SPDR ($SPY). When the green line is falling it means Canadian equities are falling more or rising less than U.S. stocks. Looking back at the last four months of 2012 we can see some deterioration in strength coming out of Canada.

Read the rest: Canada Continues To Underperform U.S. Equities (TraderPlanet)

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Are Bond Prices Close to Bottoming?

Just about every economists and major market player has come out of the closet as a bear on the bond market. Recently we’ve seen massive outflows from bond funds and even on days like yesterday as equities weaken, bonds were unable to catch a bid. But I think things may be approaching a reflection point in the bond market. Yesterday we looked at the relationship between 10-year and 30-year Treasury yields. Today I want to focus in on just the 10-year and what it may be whispering about the bond market.

Below is the weekly chart of the 10-year Treasury yield going back to 1981. You can see that yields have been falling for over 30 years as bonds have been in a bull market.

However, when yields have risen, there appear to be two things that have gotten in their way. First we have the 200-week moving average (blue line). Recent examples are  2010 and 2011, when we approached or hit the 200-week MA – putting a bid under bond prices as the 10-year yield corrected. Going back to the start of the bond bull market, there are just three instances (’94, ’00 and ’06) where yield was able to stay above its long-term moving average for a meaningful period of time.

Now turning to momentum. Using the Relative Strength Index we can see that we have only gotten “overbought” on yield (i.e. bond prices were ‘oversold) 16 times in the last 30 years! Typically we have experienced RSI diverging before yields fell (and bond prices rose) as the indicator broke above 70 and as yield continued to rise, RSI being unable to maintain its overbought status. Although, 2011 was the exception to the rule, so to speak, with yields dropping just after RSI became overbought. 10-year yield

So are we about to experience a resurgence in bonds? Based on the  above chart, it’s possible we see yields rise further, possibly testing the 200-week moving average and allowing momentum to weaken. But we could bond buyers step in here with yields rising in almost a straight line since May. I’ll be watching to see if momentum can stay elevated on a weekly basis or if things begin to weaken.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

The Shift Taking Place in the Bond Market

Aren’t Fed days fun? Bernanke gets to put on his suit and comb his beard to go out and talk to the nice reporters and tell the world what the FOMC thinks about the U.S. economy. Luckily, we get to make a day of it. CNBC fills your screen like Hollywood Squares of analysts, economists, and mutual fund managers. Yesterday didn’t disappoint. The market took its cue and was trading all over the place during the last hour after the announcement was made, only to take a dive in the last hour and a half before closing at the low. Pre-market it looks like we will be having another test of the 50-day moving average and as J.C. penned this morning – the 1600 level may be the bulls last stand.

But enough about that, lets talk about bonds! <crickets>

Okay I know it’s not the most exciting topic, but many would argue there isn’t a more important market in the world. Today I want to look at the ratio between the 10-year Treasury Yield ($TNX) and the 30-year Treasury Yield ($TYX). This ratio has been falling for years as money flowed into the middle of the yield curve, thus knocking down the 10-year yield.

Recently the bond market has been making a shift, with the 10-year taking a relative performance backseat to the longer-dated Treasury’s. This can be seen in the chart below, as the green line rises the 10-year yield is outpacing (gaining more or losing less) than the 30-year yield. And since price is inverse to yield, if the ratio between the intermediate term bonds is rising against the long-dated, then we can make the assumption that 30-year bonds are outpacing their 10-year brethren.

However, as with most things that go up, we have hit resistance. Yesterday’s Fed-induced malaise has pushed the ratio between these two yields to highs last seen in March ’12 and October ’11. We also have elevated momentum, which as I’ve discussed before is not necessary a bad thing. Going forward we’ll see if resistance can be broken and if the 2011 high will be tested. Time shall tell.

10 vs 30

While equities are sexier, we can’t take our eye off the bond market.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.