Asset Allocation Models Important This Week

Treasuries were firm last week, continuing the rally that started just after the Fed RAISED rates (as expected). Long end yields appear to be dropping because of long term inflation expectations and uncertainty in stocks. The 2/10 yield curve is at its lowest levels since November of 2006.

TLT vs SPY broke out above the descending trend line after the FOMC rate announcement as fixed income outperformed sharply as stocks decline.

This past week the 30 year bond future (USM8) rallied more than two full points and nearly touched the pivotal 200 week moving average. So, bonds are nearing key resistance while equity indices hold very pivotal support.

The S&P 500 held its 200 day moving average again. The 200dma has held on five tests this year and three time in SPX as it became clear that investors don't want this key level to break. What was interesting this week is how the long USM8 vs Short ESM8 asset allocation model held a pivotal .786 retracement mid-week. We use .786 retracements as potential reversal levels and this technical key helped lift the equity indices while seeing a pullback in treasuries on Friday. As long as this level holds we will look for equities to hold firm. If we see a break out above this level, look for further weakness in stocks.

The passive investment strategy (PIS), futures model, has been another good technical trade and indicator for overall market tone. This model uses the notional value of the 30 year bond future and the E-mini SP (ES). After finding resistance at the end of January at the top of the channel both bonds and stocks fell sharply, breaking the year long trend channel on February 2nd. A long term .618 Fibonacci retracement held nicely on February 9th before lifting to test the .618 retrace of the Feb decline. March 23rd was the short term .786 support where bonds were able to find some upside momentum.

With the long bond future nearing some major resistance and the S&P 500 Index testing and bouncing off of major support this week should be very interesting indeed. If at least part of the reason bonds have been firm is because of the weakness and uncertainty in the equity market, what will happen if bonds turn lower this week from key resistance? We'll have to monitor the PIS for a technical clue.

Another important relative value trade to watch this week is Gold relative to the equity indices. GLD vs SPY has found good resistance at the .618 Fibonacci retrace of the 2017 move. This level saw gold under-perform SPY last week and it was the high on Feb 9th when equities bottomed short term. GLD relative to QQQ touched its 200dma last Monday and the 200 day has been very pivotal in this pair. The last time it touched was on September 8, 2017 and GLD fell more than -8% in three months.

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Charts are created using CQG software. With CQG the notional value trades in futures is easy to do. If you are interested in learning more about CQG products and pricing contact newtrader@cqg.com