The inverse correlation between Stocks and Treasury Bonds has been discussed ad nauseum. I think this chart of $TLT tells the story the best (iShares Barclays 20+ Year Treasury Bond Fund). Going back to 2007, when bonds go up, stocks go down and vice versa. This has been clear, but during this 2011 Treasury Bond rally, stocks have corrected sideways, and not to the downside like we have seen in the past. Remember that corrections do not always have to take place with price, they can take place through time as well.
Looking at this chart, is the $TLT rally a warning for the stock market? Will we see the correction in price sometime soon? Or is the relative strength in Stocks a positive sign for the future? In other words, is the fact that stocks have corrected through time, and not through price during this bond rally a heads up that the next sell-off in bonds will lead to a stock market rally that could start from a higher price level? Without the typical draw-down? Even with yesterday’s massive sell-off, we’re still just 4% from new 52-week highs in the S&P500.
$TLT has been trading within converging trendlines in this “triangle” type formation. It looks like there is some key resistance coming into play here around 98 & change from the downtrendline that goes back to the 2008 weekly closing highs. How are stocks going to react from here if the Bond Market sells off?