Wednesday, September 23, 2009

Evolving Relationships Between Major Asset Classes



EBR's take is that the long Treasury bond story is getting more interesting. The 3-month chart of the long Treasury ETF 'TLT' shows that the 50-day moving average has now risen above the declining 100 day ma. When this happens but the pierced, declining ma is the 200 day ma, this event is called a "golden cross". Is this lesser event a "silver cross"? (Upper chart; click on charts for more clarity.)
The intraday chart shows a lot of volatility, with volume peaks coming in at 1 PM before the FOMC announcement, and after the Fed announcement. In other words, support for TLT, which is identical to buying interest in the long bond at the mildly higher yield.
So far as stocks went today, they reversed hard. Gold had a weak day, but . . .
Gold both intraday, over the past year, and over the past 3 years has been both a stronger performer than stocks while being less volatile.
Per Tradersnarrative.com, at least as of yesterday's close, 93% of stocks were above their 50 day ma and 95% of stocks were above their 200 day ma. No wonder a reader said recently that he was sucking his thumb in amazement at the relentless advance of stocks.
Let's put the stock market in an intermediate-term perspective, however. The "real", playable low for the DJIA in the 2002-3 bottoming process was about 7500. If we arbitrarily add 25% to that number to reflect 7 years of inflation, we get about 9300. That is roughly equal to the 50 day moving average of the Dow today.
A buyer and holder of the Dow ETF = 'DIA' from that point would have, after the ETF's expenses but including dividends, likely have done just as well buying and holding a 7-year Treasury, and would have underperformed buying and holding a 30-year Treasury.
As they say, "nobody knows anything". Strictly on a chart basis, gold and Treasuries look better to yours truly than do stocks. Personally I only like stocks of companies that are far away from the Fed shenanigans, that have had rising earnings throughout the past few years, that have rising and "interesting"dividends, and where the chart suggests an acceptable level of underlying support and appreciation potential.
Throughout the first several months of this blog, which began in December 2008, the consistent opinion re stocks was that they were for gamblers. And amazingly, it has been the gambling stocks such as Ford and BofA that paid off, though of course Citi is off about 1/3 since yearend 2008 despite more than quadrupling off its low, and GM fared worse. This blog has been kinder to gold than stocks, and gold has slightly outperformed the Dow with less volatility.

Past may be prologue. In the anxious times, all the headlines about 3 government actions or investigations re BofA would have sent the stock plummeting; lately it's ignored them. Yet the 200 day ma for BofA is not much above $11. BofA is almost 7X its low of the past 7 months and about 50% above its average price for the past 200 trading days. Gold is less than 7X its low for the past 30+ years. To present that data is to strongly suggest an answer to the question of which asset has more short-intermediate term downside risk.
My heart is with low commodity prices and prosperity. At least for the next weeks to months, my head tells me that stocks are not just for gamblers, but that the market as a whole is at least ready for a change of leadership. Did the markets begin to ring a bell today with the Fed announcement that it is planning to exit its direct interference with the mortgage market? And will the established, structural bull markets in gold and Treasury bonds resume, while the stock averages go back to meandering unpredictably?
Copyright (C) Long Lake LLC 2009

1 comment:

  1. Very thoughtfull post on prosperity .It should be very much helpfull.

    Thanks,
    Karim - Creating Power

    ReplyDelete