The Spooky Correlation Endures…
An update of the daily treasury statement charts for 29/7/11. Rather eerily, the lagged charts of the total operating balance of the US Treasury vs. US equities (inverted) continue to show a spooky correlation.
The total operating balance of the US Treasury was roughly flat over the past week (falling around $9 billion since last Friday). Moreover, around $1 billion was received from the proceeds of MBS sales on Monday. As we noted in a previous update, the US Treasury has tended to sell significant chunks of its MBS portfolio at the end of the second week of each month.
As mentioned in previous updates:
On the shorter-term timeframe, we notice a peculiar lagged correlation between the US equity indices and the total operating balance of the US Treasury. The lagged property means that this indicator has the capacity to be predictive. We generally don’t pay much attention to such kinds of analysis, but we indulge in this particular one because it is way out of the mainstream… The broad thesis is that net government spending is bullish for asset prices (on a lagged basis) and net accumulations of cash are bearish for asset prices (on a lagged basis). For a more detailed interpretation of these charts see here.
Currently, these lagged charts are suggesting that the recent weakness in the US equity indices could continue for a few more days. After that they suggest that there could be some sideways movement followed by a rebound.
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