Risk On or Risk Off, Something Else to Watch

The ratio of high yield bonds to that of US Treasuries is one indicator of the market’s appetite for risk. From the chart below of the iShares Barclays 20+ Year Treasury Bond Fund, $TLT, to the SPDR Barclays High Yield Bond ETF, $JNK, you can see there has been a clear movement towards Risk Off from March through until last week. The last 4 day pull back has brought the ratio back to

the consolidation zone where it launched higher from only two weeks ago. Is this a resting point on the continued move lower or support for another run back higher in the ratio. There are arguments for both in the chart. The Relative Strength Index (RSI) is making new lower lows and the Moving Average Convergence Divergence (MACD) indicator is about to cross negative, with increasing volume on the down move. But the 20 day Simple Moving Average (SMA) is right there. But there is something else to watch for. A Positive RSI Reversal. Zooming in on the last two weeks in the chart below shows that the low in price on May 29 corresponds with a low in the RSI. Should the low from June 7 hold and the ratio move higher there will also be a corresponding low in RSI. The interesting thing about these lows is that the second RSI low is deeper than the first, while the second low in price is more shallow. This is the set up for a Positive RSI Reversal. The target of the reversal is a move higher equivalent to the previous run higher or in this case up to a ratio of 3.53 if June 7 holds as the low. It will be negated if the ratio continues lower below the previous low at ratio of 3.19. Keep an eye on this pattern as another tell about the possible macro direction of the markets.

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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.

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