A Relief Rally Around the Corner?

It has been a harrowing week in the markets, with a 7%+ drop in the S&P 500 and greater declines elsewhere. Here, I present an update of the usual daily treasury statement charts. The lagged indicators are showing that we could see a relief rally begin at some point over the next few days.

 

Daily Treasury Statement - Operating Balance Vs S&P 500

Click to enlarge. Source: US Treasury

 

The total operating balance of the US Treasury has fallen by around $34 billion since last Friday and the remaining $5 billion in the supplementary financing program account was withdrawn. As we have mentioned in previous updates, the US Treaury is in the process of unwinding its portfolio of Mortgage-backed securities. Nothing was received from the proceeds of MBS sales over the past week; the US Treasury typically makes a large sale of its MBSs towards 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.

 

At the moment, these lagged charts are suggesting that the torrential weakness in US equities could cease soon — meaning, a relief rally could be begin over the next few days.

 

Daily Treasury Statement - Total Operating Balance Vs Dow LAGGED

Operating Balance Vs Dow Inverted & Lagged- Click to enlarge. Source: US Treasury

 

Daily Treasury Statement - Total Operating Balance Vs S&P 500 LAGGED

Operating Balance Vs S&P 500 Inverted & Lagged - Click to enlarge. Source: US Treasury

 

Daily Treasury Statement - Total Operating Balance Vs Russell 2000 LAGGED

Operating Balance Vs Russell 2000 Inverted & Lagged - Click to enlarge. Source: US Treasury

 

Daily Treasury Statement - Total Operating Balance Vs VIX LAGGED

Operating Balance Vs VIX Lagged - Click to enlarge. Source: US Treasury

Posted Aug 5, 2011

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