Another View on Bonds as a Risk On – Risk Off Measure

• Posted by Greg Harmon
• on July 8th, 2011

The stock market has been moving higher since the Greek austerity decision. No doubt about that. The shift from bonds to stock can be clearly seen fueling this rise in the market from the ratio chart of the iShares Barclays 20+ Year Treasury Bond Fund (ticker: $TLT) against the S&P 500 SPDR’s (ticker: $SPY) in the chart below. After some vacillating and a topping process in the early part

$TLT vs $SPY

of the year the ratio continued to move lower in a steep fashion over the last 2 weeks. The shift from Bonds into Stocks is something everyone is watching, looking for signs of exhaustion or continuation. But there are other signs that bonds can give us about the risk trade. Look at the ratio chart of the $TLT against the iShares SPDR Lehman High Yield Bond ETF (ticker: $JNK) below.

$TLT vs $JNK

Looks familiar doesn’t it? In this chart after moving higher from April through June it has has moved back in favor of $JNK. From Treasuries into High Yield. Risk On! During this latest fall we know that $TLT has been falling. This is expected from the first chart above, a move from Treasuries into Equities. But look at the chart for the $JNK below. This shows that the move in the ratio of $TLT to $JNK was caused just as much by the $JNK moving back to its previous highs. As it hit the

previous high resistance it printed a strong white candle and has an increasing Moving Average Convergence Divergence (MACD) indicator and a rising Relative Strength Index (RSI) supporting more upside. For risk on to continue expect the $JNK to break out to new highs. If it fails it will be a sing that the risk trade may be over. Use this along with your other tells, including the discussion on Copper from Thursday (link Below) for a more complete picture of the future of the market.

Copper Confusion is Resolving….Maybe

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