Looking back over the past several years, it appears that when investors start to get nervous about
stocks, there is a rotation into the long Treasury. SPY vs. $USB. This has been an easy rotation
trade since 2007, although it has hardly worked so well over the long term. But, since it has been
working like a charm in recent years, it is well worth watching now. It reflects confidence in
the economy (a rising SPY) as against the prospect of recession / price deflation ( an up $USB).
We are now in a risk on mode, and if you look at the relationship MACD in the bottom panel, you
can see this pro-stock impulse could carry further until the relationship starts to get wobbly. In fact,
the evidence suggests that if you're a stocks player and the long Treas. starts to rise in price, you
should double check your assumptions. Best, you should look in on this chart pretty often if
equities are your game. For now, the same might be said about the long Treas., as an advancing
economy holds the promise of upticks of inflation.
If you scroll down to the early Oct. posts, you will see I argued that the stock market was deeply
oversold and that the Treas. was heavily overbought. Both reversed trend in short order, although
I would argue the bond is still overbought and vulnerable short term. But, with the volatility in
the markets, do not happily assume the bond can only go down for a while from here. Have fun.
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