“All paths are the same leading nowhere. Therefore, pick a path with heart!” - Carlos Castaneda
Continuing along the idea that we go from summer crash, to fall melt-up, and now the “Winter Resolution of 2012,” I wanted to put a spotlight on the price relationship of U.S. Treasuries and the U.S. dollar. For those unfamiliar with the idea behind the Winter Resolution, it is not so much of a directional call but rather a call for direction. Given the length of time certain intermarket relationships have been in a volatile sideways pattern, the Winter Resolution is my belief that markets will “resolve themselves” and choose an ultimate direction to go instead of the wild path to nowhere we've been experiencing. This in turn is incredibly helpful for momentum and trend-following strategies.
Having said that, take a look at the price ratio of the iShares Treasury Bond 20+ Year ETF (TLT) relative to the Powershares Up Dollar ETF (UUP). As a reminder, a rising price ratio means the numerator/TLT is outperforming (up more/down less) the denominator/UUP.
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Notice how strongly Treasuries have outperformed the dollar for 2011 and the spike in the ratio in late July/early August as the summer crash began to express itself. However, since the middle of September, the ratio has been in a tight range as Treasuries and the dollar have been performing in a lockstep way. The two relative to each other have gone absolutely nowhere. The ratio's prolonged sideways pattern likely has to resolve itself sooner than later, and may be in a topping pattern. This should logically make some sense given incredibly low yields on Treasuries with a dollar which is nowhere near its all-time highs.
The implication would be that the above ratio turns lower as the dollar outperforms Treasuries. How could such a scenario happen? If the global economic environment improves, then yields presumably would rise faster than the dollar would decline given what appears to be a real downtrend now in the euro. If the global economic environment worsens? Yields are already at incredible lows – the U.S. dollar might get more oomph.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter.
