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The bond market has been telling us something much different than the stock market since this most recent market bounce has taken shape. Normally, when the market runs as aggressively as it did over this 20 date time span, between February 4 and February 24, we would expect the bond market to crater. Initially that is what happened, and bonds sold off at the beginning of this market rally, but in recent days the bond market has been telling us something completely different.

ETF

Market

4-Feb

24-Feb

% Change

DIA

DOW Jones

153.5

162.5

5.86%

SPY

S&P 500

174

186.5

7.18%

QQQ

NASDAQ 100

84

90.5

7.74%

IWM

Russell 2000

107.5

117

8.84%

Looking closely at the ETF for the long term US Treasury Bond, we can see that TLT (TLT) fell from about $109.5 to $106 while the market surged, and it is now over $108 again.

On the opposite side of that trade, and something I watch more closely, the double short long term US Treasury ETF, (TBT), was about $68.5 when the market rally began, and as we would expect it increased during the rally, getting as high as $72.5, but that ETF is now back near $69.

The stock market is holding most of the recent gains, but the Bond market has already reversed and it is signaling that the risks are as high as they were back on February 4 when the stock market was at its recent lows. There does seem to be a hangover from the 2013 FOMC inducements and the rally between February 4 and February 24 and the stock market is proof, but bond market investors are much more intelligent than stock market investors and the bond market is telling us that we're not in Kansas anymore.

With the bond market already within striking distance of where it was when the stock market rally began, the fast money that invests in the stock market could be construed to have been greedy in buying the recent rally because the bond market is not supporting that action anymore. This can also be a precursor to the next leg of stock market direction.

Admittedly, we had a trade in TBT that was geared to take advantage of a decline in bond prices on the heels of the rally that began on February 4, but we had that coupled with a position in the double long ETF for the Dow Jones industrial average (DXD). Our profit stops were hit in the DXD position, but on February 26 the position we held in TBT was stopped. This is important to understand because it suggests that we are not confident in the short side of the US Treasury market but instead respect the signals coming from that market suggesting that economic weakness exists that the stock market is not respecting yet.

Source: TBT: Bonds Suggest Economic Risk