The equity indices are up again today, and ahead by 3.5% or so during the past week, so shouldn't we figure that the bond market might be under a bit of pressure? After all, flight-to-safety hedgers should be unwinding their positions, right?
Well, from the behavior and juxtaposition of the SPDR S&P 500 SPY �vs. the 20+ Year Treasury Bond ETF TLT , the equity rally apparently has not allayed much of the fear out there that would argue for the liquidation of Treasuries and freeing up of capital to reallocate into stocks heading into month-end.
That's definitely a bit strange, but otherwise understandable given the uncertainty that continues to emanate from Europe, in particular, and from the developed and emerging economies, in general.
Perhaps what the SPY-TLT comparison chart tells us is that the strength in the equity indices should be ignored, and that the threat of economic dislocation and deflation are alive and very well.
From my perspective, unless and until the TLT presses beneath 121.60, I will retain a healthy dose of skepticism about the long side of the SPY.
In fact, in our May 2 article " New Upleg for Treasurys?", we argued that the 20+ Year Treasury Bond ETF was poised for a test of 124, or about a 6% upmove, which it achieved two weeks later. The target was based on our chart work, plus expected investor flight to safety into bonds.
Weak and deteriorating economic conditions and renewed fears of deflation more than likely will be present for a run at 126-127 (a plunge in rates at the long end).
Should such a bullish TLT scenario unfold, it will be interesting to see whether or not the introduction of more QE continues to be supportive of higher equity index prices.
See SPY-TLT comparison chart.
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