RECOUPLING....T-BOND REVIEW (TLT,TBF, XLU)

I've posted a number of charts in the past months that examined the amazing experience we had in 2012 where typical market relationships melted into nothing and became completely useless.  One old notion that treasuries acted inversely to the equity markets was one of these.  In 2012, we witnessed treasuries increasing in value (yields falling) and equities rising, frankly, this isn't normal.

We've speculated as to why this happened, but without fail we always came back to, "Fed manipulation" as the key distorting factor.  Is it really that foreign investors needed safe sovereign holdings and continued to by US bonds without regard for yield?  Maybe.  Was it that Joe 6 Pack was abandoning his fear and rushing headlong into the equity market.  Possibly, with a portion of his holdings.  Each answer may be correct as the Fed's insatiable desire to buy up mortgages and treasuries has artificially suppressed yields and also forced Grandma and pension managers to elect for riskier assets with "new" money in an attempt to make something.  I think this is why our equity leadership has been focused like a laser in dividend paying stocks in defensive sectors.  The average investor doesn't trust this rally and hasn't, so as he holds his nose he buys utilities, consumer staples, and healthcare and shuns small caps and technology.

Don't think utilities have been a safe-haven?  Check this out.  I haven't sold my XLU yet, but is is on the agenda.

As 2013 dawned, we've seen a recoupling of the old relationship in the first few months, and I for one, am very happy.  Yet, as happy as I have been, an odd sense of dread kicked in as the relationship over the last few weeks started to break down.  Perhaps it was Cyprus, or perhaps the huge rally in the first quarter just needed a breather, but bond yields started floating lower, yet the equity markets just continued to press higher and float out in space to new highs.  I 've highlighted the chart of TBF (which is the etf that shorts treasuries which shows the relationships I've been watching).  In this chart, TBF should move in lock-step with the equity market (SPX) which is the black line behind the TBF chart.

A month or so ago I put this chart up and called for a change in direction for the stock market, but it didn't come.  The weakness in TBF suggests that a healthy correction is in store for stock markets.

Don't get too bearish and over extended here, but certainly the chart suggests a bit lower in equity markets.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments athttp://www.goatmug.blogspot.com/

TRADING UPDATE - SLV BREAKING OUT

I'm running around today and don't have much time to post, but wanted to make a brief post.  Overall the last couple of weeks have been nuts.  The 1000 point drop and subsequent intra-day rally of 700 points followed by a 200 point loss followed by a 400 point gain leave us all wondering what the heck is going on.  As a longer term investor it frankly makes me shake my head and want to pull out and wait until the true trend emerges.  As many of you know, I believe the true trend is down, we just have the invisible hand of government creating an illusion and delaying what is necessary for this country to be an economic leader.

In the mean-time we see our government has now exported solutions like the TARP to Europe in the form of IMF funding (we are 17% of the IMF) loaning money and making swap lines available to the EU, IMF, and ailing nations.  Isn't it great that you didn't have a say in how your money would be frittered away?

As yesterday's announcement was made the EURO seemed to come alive and vaulted higher on the news that Greece and other ailing nations would be bailed out.  The ECB and IMF will directly support (buy) bonds of these bankrupt nations and prevent them from falling in price (sound familiar?- the US says that it just stopped doing that but we know that Japan is now doing it as well).  By buying the bonds in the open market it distorts the real price of bonds so it hides the real  or appropriate cost of the risk, and also allows the ailing country to continue to roll its expiring debt.    So, essentially the ECB and IMF basically are allowing the lies that European nations are actually worthy to lend money to --- to go on.  And of course, we're lending them more money when borrowed money is actually the problem.

There was only one problem with how things worked out yesterday.  The EURO fell apart at the end of the day and ended exactly the same way it had at the beginning.  Essentially traders didn't buy the whole buyout and bailout and think that this doesn't do anything but buy these countries a few more months or a year.  Traders are putting their money down shorting the Euro.  Rumors are being posted that the banks in Europe are actually shorting the Euro too!  Isn't that great, we're essentially bailing them out by buying sovereign debt of countries (which they hold on their balance sheets) and they are shorting the Euro knowing that it will continue to fall.   The act of shorting continues the problem and continues to make it fall!

So to summarize, the bailout added more debt as a solution for too much debt.  The US taxpayer has no say in giving away money that is doomed not to be repaid and the bankers in Europe are going to make money on failing as they bet that they will fail!

Gold and silver are tipping us off too that the market believes this is either going to be a collapse where metals will be the only thing worth anything or they are betting that this is inflationary and the metals are going to go up as inflation kicks in.  Here is a chart I'm watching on SLV.  I hate buying anything when it it is near highs, but it is clearly breaking out to the upside.

No matter what, I think we will rise, but again, I'm leaning toward the idea that we retest 10250 again on the DOW.  I'll put up some charts and show why I believe that, but no matter what, I'm going to bet that many Joe 6-Packs just take their money out of the market and let the computers eat each other alive.  This market is insane and not based on fundamentals, just market moving stories strung together, which is hard to trade.

GOATMUG