Sunday, November 21, 2010

Bonds or Equities – Who Is Right?

The 30 year treasury has correlated very well with the SPX as shown on the chart below (note the 30 year price is inverted).   Perhaps I should say it did correlate well into the summer time frame and then diverged when QE2 was first discussed. If you assume the bond market is correct, fair value on the SPX would be about 1,000 right now. One could argue though that the bond market has it wrong this time (at least the 30 year) based on where QE2 purchases will focus their attention (the middle of the yield curve). In the dash for yield though, relative to other maturities the 30 year should begin to draw further bids.

The next chart is the weekly Commitment of Traders report for Commercial Net Positions (US Long Bond) versus 30 year price. Commercial traders went aggressively short relative to prior positions in October and then reversed those positions pretty aggressively as well. The question then is do they continue increasing their net position or follow the YTD trend and reverse and short into strength? Friday's CFTC report should be very telling.


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