As stocks lost traction so far this year, investors turned to long-term treasuries for better performance. Treasuries especially long-term treasuries performed much better than the S&P 500. The daily chart below shows TLT, the iShares 20+ Year Treasury Bond Fund ETF with On Balance Volume in the indicator window along with price relative to the S&P 500. OBV started to show a bullish divergence from September, 2013. Starting this year price relative has been showing that TLT clearly outperforms the S&P 500. Early March there was a golden cross, the 50-day moving average crossed above the 200-day moving average, which confirms that investors have more confidence in long-term bonds at least until stocks find a firm support.
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Long-term treasury bond ETF TLT is normally negatively correlated to the S&P 500. During the past couple of weeks this correlation turned positive. Soon this correlation will go back to negative. Either SPY or TLT is going to turn up.
During times when the stock market is trending higher investors are willing to take more risk for greater returns. This is the time when most investors move their money into equities. This is the so called risk-on mode. During this time the less risky bond assets are not so popular. In a risk-on mode money is moving out of bonds into stocks. On the other hand when the smart money perceives the stock market too risky they move money from stocks into treasuries. This is the so called risk-off mode. As the market is going thru up-trends and corrections so are investors going thru risk-on and risk-off periods.
This is the reason why the relationship between stocks and bonds can give indication about the market sentiment and especially market sentiment changes. The chart below shows SPY with the 20+ year treasury bonds TLT. Below the chart the correlation coefficient shows that stocks and bonds most of the times are negatively correlated. As you can see the smart money started to rotate money out of stocks into bonds ahead of a possible market correction. This gives a higher probability that a market correction will happen in the near future. |
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