QuantitativeExhaustion

Risk On or Risk Off, Bonds or Stocks ?

AMEX:SPY   SPDR S&P 500 ETF
1455 43 32
In the beginning of 2014 we saw a big shift with investing. Investors bought both US stocks and US bonds. This trend lasted up until September of 2014, about same time oil             started to break down and stocks became very volatile. Also during September we saw a big shift to US bonds. As the market gyrated with oil             volatility - OVX             - US bonds grew even stronger.

However, today I saw what looks like a turnaround in this trend since September. As oil             went up, stocks went up and bonds went down by a significant amount. This is important event, because it signifies were in an early stage of another risk on move, meaning investors will once again take more risk in the equity markets rather than bonds. So I will be looking for a top in TLT             . Stocks may still get a bit more gyration with oil             , but we should be looking to buy dips.

Note: You can also read up on my related Stage 4 to Stage 5 of Intermarket Analysis, which previews a reasoning for when to take bets in Financials. In this case your best bets might be with European Banks.
Too early to tell as both SPY and TLT are still moving logically within their channels. Bond market tends to be right but I think TLT will consolidate (range) from here for quite some time before any significant move. Global deflation force may keep bond yield low for some time.
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Well I'm being bold here, and calling a new trend change with US bonds and US stocks. Today, traders made decisive conviction to make the switch.

Global deflation, that alarming argument is overrated. US is proud and strong, and with ECB and Bank of China recent action the rest of the world will grow strong. Don't follow the noise, follow the money.
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Here is the SPY/TLT chart I've been tracking for quite some time. The ratio down trend appears to have been established, at least technically.

snapshot
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So your using this analysis to conclude global deflationary events are right around the corner?

Much has changed since 2008-09 backdraft. We have a great deal of liquidity that has near 0 velocity. Before we had a decent deal of liquidity with increasing velocity. This is because this liquidity was in the hands of middle class consumers. Now liquidity is tied to corporations and super wealthy. This liquidity jumps to asset classes that have the ability to perform with low amounts of risk. This money is ready to move once again to a low risk asset with assurance that it will continue to rise. Where is that ? Europe and Asia (most notably financials to start)
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CosmicDust QuantitativeExhaustion
Central banks have been trying so hard (Japan, EU, and US) to achieve 2% inflation goals but not successful (so far) I think that is very telling.
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It's not dangerous that we are not achieving 2% inflation.

You can't have 2% inflation when all the money is locked up to only a few members. Smart money does not create bubbles nor inflationary risk or deflationary risk. Smart money goes where there is an opportunity for a return, however never reaching excessiveness.

You are right, central bankers cannot do much more. It is up to Governments now to create an environment that builds inflationary pressures. Force corporations to spend capital and generate revenue plus profits, instead of cost cutting for a larger profit. Which generates marginal revenues and increasing profits.

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Hey JR

I just realized you published this before I published my latest post.....
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I read your post. Seems we have a difference of opinion. I've seen the ratio chart SPY/TLT several times. Risk On (SPY) / Risk Off (TLT) is a common theme for the market participants. We're getting closer to risk move back in equities and away from bonds. Really looking at financials, most notably European Banks like DB.
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Algokid PRO QuantitativeExhaustion
Absolutely, Treasuries are getting killed this month. I believe we are going back in equities as well. I know market participant already priced in future interest hike by the FED, but can't wait to see the actual reaction when they do.
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Are you waiting for equities to disconnect from oil volatility?
snapshot
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Algokid PRO QuantitativeExhaustion
Not really , I'm still heavily invested into SPY , despite the double digit volatility, which is kind of expected at the beginning of each year. But good observation on the relationship between oil volatility and the SPY .
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TreborDone Algokid
replace SPY to TVIX
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TradeEmpowered TreborDone
What would the ratio look like?
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jangseohee TradeEmpowered
SPX/OVX ratio:
snapshot
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Biggest winner with US bonds going lower would be Deutsche Bank.
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QuantitativeExhaustion PRO QuantitativeExhaustion
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Here is a look at RSI 14 and RSI 50 Divergences
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if Junk bond is going up, so as SPX?
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Not always.
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Junk Bonds are something to look at and compare to equities.
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jangseohee QuantitativeExhaustion
it was until mid 2013
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TradeEmpowered jangseohee
So HYG broke out. Do you believe a rally is for real or is this a common head fake?
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jangseohee TradeEmpowered
JNK is very close too HYG, but
there is a gap (blue) up there, it might wants to fill that gap before coming down (it sound ridiculous)
snapshot
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TradeEmpowered jangseohee
Question for jangshoee. So HYG broke out. Do you believe a rally is for real or is this a common head fake?
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jangseohee TradeEmpowered
TradeEmpowered,
1st. RSI is forming a rising wedge as well as the price.
2nd. Price is engaged in original red channel, somehow fear kicked in and accelerated blue channel forms.
3rd. even if price breaks above the rising wedge for real, price just resume action in original red channel.
4th. having said that, the potential resistance blue zone will be between red channel top and the horizontal line if price breaks out
5th. else the blue channel will take charge

Hence, IMHO the breakout is real but not for long

Please do your own analysis in case you want to trade this :-)
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?
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That is a good find. When compared to SPY you can see that after every move down in TIP/TLT ratio we saw markets follow. This time is different. US has not experienced any sort of deflation, while there is suggested slow growth in Asia and obvious no growth in Europe (exception a few countries).
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snapshot


When compared to oil we can see the trend really picked up this time around.
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luke1827 PRO QuantitativeExhaustion
Wow, why do we see such a high correlation between the moves of TIP/TLT and Oil?
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Well TIP's are used to hedge against inflation and TLT is a hedge against deflation. With TLT outperforming TIP's by a large margin, then that means investors believe there is risk of deflation. If investors are fearful of global deflation they sell oil.
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jangseohee QuantitativeExhaustion
Hands down :-)
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jangseohee QuantitativeExhaustion
I don even know how to explain this :-)
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luke1827 PRO QuantitativeExhaustion
I don't think the correlation is causal, where TIP/TLT would lead to investors fearing global deflation and selling. In the recent context, with the slide in oil prices, for whatever geopolitical/economical reasons, might in fact have been the lead into a more deflationary environment, or it might not have been entirely and the root of the it could have been the strong dollar or other reasons.
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No they (oil traders-speculators) are not looking at TIP/TLT, but TIP/TLT is describing what's going on in the market place. TIP/TLT ratio started a downtrend much sooner than US Dollar. So perhaps it is a ratio we should be weary of for now on.
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luke1827 PRO QuantitativeExhaustion
Oh I see. Thanks for the insight!
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TradeEmpowered jangseohee
Nice find jangseohee. You're really good at finding ratio charts that matter.
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jangseohee TradeEmpowered
It is after playing around with different ratio that i stumble upon those.
The peril of playing with ratio is:

There are 6 permutations of getting the ratio.

When ratio goes up:
1. inputs into only numerator, while denominator kept constant
2. numerator and denominator both increase, but numerator increase more
3. numerator increase a lot while denominator decrease a little bit

The opposite applies for When the ratio goes down.
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jangseohee TradeEmpowered
Just found yet another ratio, SPX/FXY :-)
I will let JR to do the explanation

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???
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About all I could find was a negative correlation with European Stock ETF VGK. Looks like if US Dollar would weaken with US Yields going higher, that would strengthen European stocks. This is contrary to what most believe, including leading economist.
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jangseohee QuantitativeExhaustion
for DXY/TNX, i wont rule out another "push" higher to finish thing off nicely
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TradeEmpowered jangseohee
Do you have any other correlations and channels that we should worry about?
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jangseohee TradeEmpowered
for co-relation, i need to shop, JR might have more
soley for channel i have a few more
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i am not suggesting anything here..
but the flattened 50ema caught my eyes
snapshot
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No negotiations on Greece at EU summit, officials to meet Friday

BRUSSELS (Reuters) - European Union leaders did not enter into any negotiations on Greece's economic problems on Thursday, leaving the talks to officials who are to meet on Friday, the chairman of the EU summit Donald Tusk said.

"The leaders did not enter into a negotiation on Greece," Tusk told a news conference after Thursday's Brussels summit.

Greece, where the anti-austerity government of Alexis Tsipras took power in January, needs money to keep it afloat while it negotiates with the euro zone on what should replace a 240-billion euro (178 billion pounds) bailout scheme that expires in two weeks.

Euro zone countries want Athens to ask for a technical extension of the current programme to buy itself time until something else is agreed. Tsipras rejects that, arguing he won elections on promises of ending the bailout.

An emergency meeting of euro zone finance ministers on Wednesday failed to produce a statement or even an agreement for euro zone and Greek negotiators to continue talks before a last-chance meeting of euro zone ministers on Feb. 16.

But the president of the Eurogroup of euro zone finance ministers, Jeroen Dijsselbloem, agreed with Tsipras on Thursday to continue talks between Greek and euro zone officials to find common ground.

"I am optimistic that we will have an outcome on the technical process," Dijsselbloem told reporters.

But he added: "I am very cautious on the political side. It is going to be very difficult. It is going to take time. Don't get your hopes up yet."

After Feb. 16, EU officials fear that even if Greece were to ask for an extension of the current programme, there would not be enough time for some euro zone parliaments to approve it.

Once the bailout expires on Feb. 28, Athens will lose access to euro zone or market financing and its banks will lose access to European Central Bank refinancing or the 11 billion euro EU safety cushion for their possible emergency recapitalisation.

Greece would also lose eligibility to negotiate more time to repay the loans it got from the euro zone.
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