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Thursday Technical Update: Treasuries vs Equities

  • Written by Syndicated Publisher 310 Comments310 Comments Comments
    January 27, 2012

    Today was another battle in the war between US Treasuries (UST) and equity. Both continue to try and breakout and move higher, something that is simply not sustainable. Let me rephrase that it is sustainable to an extent.

    That was the case over the past five months. After a breakout to all time highs in July UST have simply consolidated above those highs while equity has been able to inch higher. Equity now sits up against pretty stiff resistance but to be fair has taken out prior resistance levels with relative ease.

    In Wednesday’s Market Recap I discussed how the FOMC statement was bond positive and far less so for equity. The economy was downgraded. Bernanke appeared to step back from promising QE3 when discussing “the transmission mechanism” for example. Instead he told the bond market low rates are here for even longer than was previously forecasted.

    The result was instantaneous in bonds. The entire yield curve put in a very bullish move breaking out of bull flag patterns on very heavy volume. Today UST continued that bullish trend closing at or above the previous days highs again on heavy volume.

    The two year now sits at all time highs. The five year is set at a minimum to test all time highs but likely will push higher. The ten year also is within a day of testing and possibly taking out all time highs. It is my belief that if this happens as was the case in late July an already stretched equity market will face a very sharp and nasty selloff. As was the the case in July the equity UST divergence was closed in two weeks. Today the divergence is even larger than the previous one.

    So on that note my focus remains squarely on UST futures. Below are six month daily charts of  the 2, 5 and 10 year futures.

    Two Year

    Five Year

    Ten Year

    Bottom Line

    Today was a big day in UST. They look extremely bullish here. At the same time a tired equity market put in a rather sharp reversal today. Clearly this war has not been decided. Equity did bounce off support which the prior day had been resistance and was able to close off the lows. Although the UST charts look very promising until they actually close above all time highs then nothing has been decided.

    On the currency side the EUR and AUD put in nice reversals as well on the daily chart as did the USD after breaking through key support levels and recapturing into the close. It is my firm belief though that if and when UST breaks out the equity market is going to find itself struggling to find the capital needed to push higher.

    When faced with two asset classes, one UST at all time highs versus equity at six month highs, many investors will choose the credit side of the ledger. It’s also important to realize based on the MOVE index UST has not even seen the fear buyers yet. Meaning any event that triggers fear will drive more investors into UST and out of equity.

    Perhaps Friday’s GDP report will be the catalyst. There are plenty of possible headlines out there.

    Images: Flickr (licence attribution)

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