Caution from Treasuries Breaking Out to New Highs

File this under “I didn’t expect that!” – Treasury prices continue their recent rally and broke powerfully to new highs at roughly the same time the US Stock Market surged higher beyond resistance.

The implication is that “something’s gotta give,” so let’s look at the situation and try to figure out what’s likely to happen next.

We’ll start with a pure chart of the TLT or popular Treasury ETF:

TLT Treasury ETF Daily Chart

The chart above shows the popular bond fun trending higher (all through 2014 while stocks were flat/rising slightly) into today’s breakout above the $113 price level.

Keep this chart in mind when you study the S&P 500 as it breaks similarly to all-time highs from a sideways consolidation through 2014.

Let’s take a closer look at the recent price action of these markets:

TY 10 Year Treasury Notes 120 Minute Chart

In general, or at least in today’s environment, stocks and bonds tend to trend (trade) in opposite directions.

A rally in stock prices is often a “Risk On” or bullish environment where money flows away from “Risk-Off” markets like Treasuries.

Similarly, during downturns in the stock market, money flows from the ‘risk’ of stocks into the protection of Treasuries, Cash, or other ’safety’ markets (or sectors like Utilities).

We can see this short-term on the @TY (10-Year Treasury Futures Contract) and @ES (S&P 500 e-mini futures contract) through the months of April and May.

Note the stable inverse relationship (one goes up; the other goes down at the same time and vice versa) on the chart which was reversed at the end of April and continues into May.

While stocks held flat at the highs near 1,880, Treasuries quietly crept higher and broke powerfully higher above resistance today.

The powerful breakout is a culmination of money flow into Treasuries over the last few weeks – and stocks have pulled back only slightly.

Here’s another view of the same situation:

$SPX S&P 500 Daily Chart

This time we’re using the S&P 500 Index (green – scaled on right) with the TLT Treasury ETF (red – scaled on left).

Similarly, the inverse relationship held strong for most of this time period until the highlighted area from March to present.

During the last few months, stocks traded sideways-to-up while Treasuries (TLT) traded straight up.

What does it mean?

Take a moment to study my prior “caution” post “Clear Warning Sign from Consumer Staples/Discretionary Charts” which shares similar logic (bearish or defensive money flow taking place behind the scenes of a market thrust up to all-time highs).

In fact, let’s take it one step further and draw a similar comparison chart to 2011:

$SPX S&P 500 Daily Chart

I showed a similar chart of the S&P 500 and the Consumer Discretionary (XLY)/Staples (XLP) relationship and the 2011 short-term stock market peak/top ahead of a violent reversal which took place through July and August (the S&P 500 bottomed near 1,100 – down from its 1,375 peak here).

Note how Treasuries – in this case the TLT ETF again – bottomed in February, stocks traded flat-to-slightly higher yet Treasuries surged off the early 2011 low.

No, I’m not an alarmist, but I’m drawing parallels to a historical pattern that appears to be repeating in a similar manner (with stocks at all-time highs yet money flow showing defensive moment beneath the surface).

It doesn’t mean history will repeat exactly, but it does suggest increased caution and reduced rampant bullishness as we monitor (and trade) what happens next from a similar situation to mid-2011.

For more daily updates from Corey, visit his blog at Afraid to