Our focus to start things off today is going to be on the bond market. Specifically we are intrigued by the weakness of the long end of the U.S. Treasury market.
Over the past few weeks 30-year Treasury yields have risen from a low of close to 2.5% to just over 3.1%. We will suggest that if the markets are really concerned about another bout of major bank collapses that yields would be declining instead of rising.
With our premise set we startbelow with a comparison between crude oil futures and the CRB Index along with the ratio between the Amex Oil Index (XOI) and the S&P 500 Index (XOI).
In general these two ratios trend together but from October into January they have rather sharply diverged as oil prices have weakened relative to general commodity prices even as the major oil stocks have risen against the broad stock market.
The argument would be that even with crude oil at current levels the major oil stocks still represent less risk than just about anything else. In other words the rising trend for the XOI/SPX ratio is more a reflection of an aversion to risk than the strength of the trend for energy prices.
We can see this somewhat better through the chart below right. This chart compares the U.S. 30-year T-Bond futures with the XOI/SPX ratio.
The first point would be that nothing much has really changed as of yet. Bond prices are certainly lower as yields have risen but one would be hard pressed to call a correction back to the 50-day e.m.a. line as a true ‘trend changer’. Our thought, however, was that the TBond futures were weaker on Tuesday as the equity markets collapsed and weaker once again yesterday as the equity markets rallied.
This suggests at least the possibility that something has changed. The bond market may be completing a three month trend that began in mid-October and ended in mid-January. This trend went with oil price weakness but it also went with considerable strength in the oil price shares. If the world is truly changing then we would expect to see 30-year yields rise from around 3.14% through 3.2% in the days to come. While nothing in the markets is ever 100% conclusive this would certainly help support the notion that money has stopped fleeing towards safety and is beginning to shift- at least marginally- back towards the higher returns available outside of the Treasury market.
Equity/Bond Markets
Belowis a chart comparison that we showed in the IMRA on many occasions some months back. It is time, we suspect, to return to it.
The chart compares, from bottom to top, the stocks prices of Wells Fargo (WFC), Carnival Cruise Lines (CCL), and the ratio between the Amex Oil Index (XOI) and the S&P 500 Index (SPX).
The argument was that WFC should ‘lead’ the markets out of the current negative trend and that this recovery would begin with the start of weakness in the XOI/SPX ratio. Obviously the XOI/SPX ratio is at new highs while WFC is close to the lows so we will argue that the process of recovering hasn’t begun.
In terms of this chart things don’t even begin to get interesting until the XOI/SPX ratio breaks below the 200-day e.m.a. line (on the way, we expect, to a ratio of .6:1 if not .5:1) and WFC rises back above 30. A few weeks ago as WFC returned to 30 things looked a lot closer to a positive resolution than they do at present. Still… we like the argument even if it is still lacking for traction.
One the one hand the U.S. 30-year T-Bond futures have only corrected a fraction of the gains from the October lows but on the other hand… Micron (MU) looks better (as does IBM and Apple). MU trends inversely to the TBond futures so the stronger its share price the more negative the trend for the TBonds. We show the comparison at bottom right.
Some months back we spent some time fixating over various combinations of the price for the TBond futures and the U.S. Dollar Index. The idea was that if the TBonds and the DXY were rising then one is best off holding to the large cap defensive stocks. One the other hand if the DXY is rising faster than the TBonds (DXY minus TBonds moving upwards) then one should focus on sectors such as tech.
The point? From July into January the trend favored the consumer defensives as the sum of the TBonds and DXY moved higher. This month we are starting to see indications of strength in the dollar relative to the bond market which shifts the ‘lean’ back to the techs.
