Diary of a Financier

Outlook: Stocks & Bonds

In Capital Markets on Fri 11 Feb 2011 at 15:28
  • AGG at a key level, a convergence of Fibonacci, trendline & historical support around $104.
  • Bullish on SPX, which has little standing between here & 1400, even 1425.

Just an update as things here develop.  The Aggregate Bond Index (AGG) shows fixed income around a critical support this week, likely holding the line at $104.  Next week’s action holds the key to AGG’s 1q11 performance.  The S&P 500 (SPX) has punched through its Fibonacci 61.8% test level, and I can’t find anything to prevent it from 1400, with next resistance as far as 1425.

AGG is putting up a fight, but momentum should prevail to cast bonds into a deeper abyss next week:

AGG daily- resting on its bull trendline, Fibonacci level, and historical support around $104. MACD confirms the downtrend, having failed to rally about zero.

We’ll see if AGG can hold the line, then bounce off $104.  Again, I doubt it.

The SPX picture is rather simple–simpler than AGG at least.  Momentum, trend & resistance are all letting SPX run into the 1400’s:

SPX daily- above its last Fibonacci level, above its last resistance at 1300, this will run until next resistance around 1425. Even momentum in its favor.

A good check for my stock bullishness is as follows: would I short SPX here?  Absolutely not.  Never fight a trend like this.  On the other hand, would I short AGG? Perhaps, but I’ll wait to see its next move.

The nuttiest part of this stock/bond story is the long-term charts, which stress the importance of these new, critical levels I’m watching:

Our Absolute Return strategy has held 50% stocks, 20% bonds (laddered), 10% alternatives, 20% cash since December–that’s before two approximately zero net relative strength pair trades.  We’re going to increase our equity allocation to 60%, and maintain our bond ladder.  Cash will drop to around 10-15% as a result.

I wish there were more open interest in AGG options, because I’d love to snatch up some June 100 puts to hedge some tail risk.

In summary: we’re buying SPY; we’re waiting for AGG to crack below $104.

–Romeo

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  1. […] about the markets, this is a terrific checkpoint for the development of our outlook (January/February) for major markets.  In the interest of brevity, I’ll keep the discussion to the following: […]

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