A Love Triangle: Bonds, Equities and the Dollar

• Posted by Greg Harmon
• on March 6th, 2012

The one sector that has baffled many market participants Since November has been the Bond market. Take a look at the chart of the iShare Barclay’s 20+ Year Treasury Bond Fund, $TLT, below. Sideways for four months. The SPDR S&P 500, $SPY, went through some gyrations and then moved higher. But bonds were unphased. The US Dollar Index, $UUP, fell, rose and fell again, but $TLT just kept going sideways. Is this going to go on forever? Actually it looks as though

iShare Barclay’s 20+ Year Treasury Bond Fund, $TLT

the $TLT is at a tipping point with both the $SPY and $UUP now. How it resolves could set in motion a long term trend that many have been anticipating. The chart below shows the ratio of the $SPY against the $TLT. A move high signals a shift from Treasuries into Equities and a move lower in the ratio the reverse. Since the sharp move lower in August it has been building a rounded bottom. Now back at the top of that pattern and consolidating it may be ready to break out higher again. The Bollinger bands have gotten very tight foreboding a move, and the shorter 50 and 100 day

Simple Moving Averages (SMA) are turning higher towards the 200 day SMA. A move up is also supported by the Relative Strength Index (RSI) which is holding bullish. Equities may be about to win the war with bonds. But interestingly the ratio of the $TLT against the $UUP is also ready for a move. In a bull flag for 6 months after rising out of a W -V pattern, it could break the flag either higher or lower. A break lower would make the most sense from an inter-market correlation perspective. This would signal a flow out of bonds, showing Dollar strength. A strong Dollar with

rising Equities has historical precedence, much more so than a strong bond market and rising Equity values. But just because there is a strong precedent does not mean it cannot happen. The relationship between these three assets will continue to be the focus of many macro traders as well as trend followers. Are you watching them too?

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