Dragonfly Capital | Mar 01, 2013 12:28AM ET
The risk on, risk off market has been in full swing recently, with the SPY traveling more in the last 6 days than the rest of the year prior. Many look at this increased volatility as a sign of a top with a wicked correction just about to come. Others are working back to a more normal volatility range with an overshoot in the process. When things are not clear, it make sense to pullback to a longer time frame for improved clarity. And when looking for clarity in a risk on, risk off world try the bond market proxy, the ratio of US Treasuries to High Yield Bonds.
The Meaning
What does this mean in real world terms? There was a big money flow into risk assets from risk-free assets late 2008 until early 2011. As the stock market was bottoming during the financial crisis, the shift began. Since then - a short rebound, almost correcting an over adjustment and then, stagnation. A balance between risky and risk free assets that has held for 2 years. A break lower on the ratio, would indicate another leg of funds moving from risk free assets to risky assets. Be it high yield bonds or equities, a break lower in this ratio is very bullish for the stock market and risky assets everywhere. One final point. The Federal Reserve has not been very good at disguising that this is their goal. They are throwing a lot of money at it. Will you bet against them?
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Original post
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