Friday, August 28, 2009


You are not alone if you feel a sense of increasing risk as the equity markets continue to elevate after a 50% plus run in 6 months. One can only imagine what kind of moon shot would have occurred if the fundamentals were really good as opposed to less bad. Nonetheless, buyers of the i-Shares Lehman TIPS Bond Fund (symbol: TIP) are also sensing the risk of a rising equity market built on so much hope.

Figure 1 is a weekly chart of the i-Shares Lehman TIPS Bond Fund (symbol: TIP) in the top panel v. the S&P Depository Receipts (symbol: SPY) in the bottom panel. First, the movements of these two instruments are poorly correlated across multiple time frames. Second, TIP's tend to top when investors are bearish on equities as determined by the "Dumb Money" indicator, and TIP's tend to bottom when investors are bullish on equities. In essence, when investors seek safety from equities, they move into TIP's. And this appears to be happening even though the equity markets continue to defy gravity.

Figure 1. TIP v. SPY/ weekly

Looking at figure 1, we note the current "breakout" in TIP over a down trend line (inside the gray oval). TIP's bottomed (inside the gray rectangle) in 2006 and 2007 while the SPY was in the process of topping out. TIP's then moved significantly higher in October, 2007 once the top was in for equities (noted with vertical red line). Tips generally moved higher from 2004 to 2005 (black up arrow) while equities were range bound.

In sum, the TIP's ETF has "broken out" as it appears to be attracting the interest of investors. Why this is so in the face of a rising equity market should be of interest (and maybe a note of caution) to equity investors and those who see nothing but bullish pastures ahead. In the past, TIP's has generally performed well when equities have underperformed. I view the rise in the equity markets as a time of increasing risk, and it appears that TIP's investors feel the same way too.

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