A Global Shift to Deep (But Empty?) Pockets

• Posted by Greg Harmon
• on June 2nd, 2011

US Treasuries have been moving higher. I’ve heard many reasons for this. The Greek Crisis, problems with the Euro, a move out of stocks as QE2 ends. These may true. But where are we in this process. Is the move nearly done? The ratio chart of the iShares Barclays 20+Year Treasury Bond ETF, (ticker: $TLT) against the iShares/Currency Shares Euro trust (ticker: $FXE) below shows a large move higher in the ratio since the beginning of May into a consolidation area

TLT vs FXE

just under the 200 day Simple Moving Average (SMA). But the technicals are starting to suggest the that run may be over with the Moving Average Convergence Divergence (MACD) indicator crossing negative. But what about QE2? The ratio chart of TLT vs the S&P 500 SPDRs (ticker: $SPY) below shows the TLT very strong against the SPY. The ratio looks to be breaking out of

TLT vs SPY

the long rounded bottom that has been building throughout 2011. This would suggest that there is still more upside fueled from a move out of stocks. But maybe there is yet another reason for this movement. Below is a ratio chart for TLT against the iShares S&P National Municipal Bond Fund (ticker:$MUB). This ratio had been in a downtrend with upside resistance at the green

TLT vs MUB

trend line from August 2010 until it started to break above it in May. That put it in a basing pattern, within an ascending triangle (blue dotted lines). As the triangle has been forming the Moving Average Convergence Divergence (MACD) indicator has been trending higher, crossing positive last week. Also the Relative Strength Index (RSI) has been trending higher. The volume pattern has also been interesting during this short triangle. On up days the volume has generally been strong at between 100 and 150 million shares, but on the down days the volume has been much lower. But the most interesting feature is that on Wednesday it broke the ascending triangle higher on very large volume. This is an indication that the basing is now turning into a reversal higher.

Investors are starting to prefer Treasuries over Municipal Bonds. Think about what this could mean. The first thing that comes to mind is a belief that the debt ceiling debate will not be solved shortly, impacting State and Municipal funding quickly as most of their financial year ends approach. This does not look to be the case yet as the MUB chart shows the price at a recent

MUB Daily

highs and near the previous top from last Fall. MUB should be falling from the double top if this belief were true, and if it does then it could be a catalyst for a big move higher. Sorry Meredith not yet. Instead it looks to be holding up well, for now.

These charts suggest that the upside for Treasuries is not nearly over and may be just getting started. If you are one of those that is chomping at the bit to short Treasuries for macro economic reasons now does not look like the time. But with Uncle Sam there to help everyone it certainly looks like it will be a doozy of a trade when the time comes.

(As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

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