Selling Quality for Junk is a Good Thing for Stocks
- Posted by Greg Harmon
- on November 21st, 2013
As the stock market started to pull out of the bottom made during the financial crisis one measure of risk taking, the ratio of US Treasuries ($TLT) to Junk Bond ($JNK) moved into a channel and started heading lower. The chart below shows the broad channel between the two bright red lines. This is a risk on measure, showing assets flowing from US Treasuries into high yield bonds. This continued throughout 2009 and into 2010. You can also see from the chart that the ratio is highly correlated to the S&P 500 ($SPY, blue area). It topped at the peak in 2010 and pulled back. It then surged higher again into 2011 and only to pullback into late 2011 and 2012. The latest move higher off of the double bottom began in May 2012 and continues today. The ratio becomes interesting in the short run as it is at a critical retracement of the move lower, at 61.8% of that range. To a technical trader breaking this Golden Ratio level can mean a continued move to the top of the channel with increasing confidence. Not a guarantee, but as if a speed bump or barrier has been removed. The other indicators that a technician might follow measuring momentum support a continued move up in the ratio and the ratio itself shows that it has room to move higher over this level without resistance from prior history without another test for a while. The green triangles show a Harmonic Bat (now we are deep into the technicals) formation that targets a move much higher to give an estimate of just how far it could go.
A continued flow from US Treasuries into high yield bonds does not guarantee a move higher in stock prices. But it adds to the broad context of measures that support more upward price action in equities.
Want to learn more about Dragonfly Capital Views?
Dragonfly Capital Views Performance Through November 2013 Expiry and sign up here for the free 7 day trial before you pay.
If you like what you see above sign up for deeper analysis and trading strategy by using the Get Premium button above. As always you can see details of individual charts and more on my StockTwits page.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.blog comments powered by Disqus
Gregory W. Harmon CMT, CFA, has traded in the Securities markets since 1986. He has held senior positions including Head of Global Trading, Head of Product Development, Head of Strategy and Director of Equity. (More)
- Top Trade Ideas for the Week of March 30, 2015: The Rest
- Top Trade Ideas for the Week of March 30, 2015: The Rest Premium
- Top Trade Ideas for the Week of March 30, 2015: The Best
- SPY Trends and Influencers March 28, 2015
- Macro Week in Review/Preview March 27, 2015
- Trading the Ratio of Oil Servicers to Oil
- Trading 3 Black Crows, A Hammer and On Semiconductor
- Premium Earnings 3-26-15
- Crabs and Sharks in the Gold Chart: Update
- Designing a Spring portfolio improvement trade in Home Depot