Something other than disastrous price action over the next two weeks?

For about four days the financial markets have been experiencing some kind of relief rally. Or, if the term ‘rally’ is too strong for you, then you might say that the price action hasn’t been completely disastrous over the past three or four days. Here, I present an update of the usual daily treasury statement charts. The lagged charts are suggesting that this ‘not completely disastrous price action’ could continue for another two weeks or so.

 

Daily Treasury Statement - Operating Balance Vs S&P 500

Total Operating Balance of the US Treasury - Click to enlarge. Source: US Treasury

 

The total operating balance of the US Treasury was roughly flat over the week, rising from around $15 billion last Thursday to $16 billion on Wednesday (latest). The US Treasury is currently in the process of unwinding its portfolio of Mortgage-backed securities (which was of one of the clues about the public sector’s ongoing clean-up operation). Over the past week, nothing was deposited from the proceeds of MBS sales. As can be seen from the following chart, the Treasury tends to make a big sale around the end of the second week of each month:

 

US Treasury MBS Sales Vs S&P 500

US Treasury MBS Sales Vs S&P 500 - Click to enlarge. Source: US Treasury

 

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.

 

Right now, these charts are suggesting that the price action over the coming two weeks could be relatively ok. To be sure, we could still have weakness in the markets, but these charts suggest that such weakness would not be as drastic as the past two weeks.

 

Daily Treasury Statement - Operating Balance Vs Dow Inverted LAGGED

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

 

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

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

 

Daily Treasury Statement - Operating Balance Vs Russell 2000 Inverted LAGGED

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

 

Daily Treasury Statement - Operating Balance Vs VIX LAGGED

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

See here for our collection of rare historical economic data.

Posted Aug 12, 2011