Written for First Post
January 14, 2011: Is fear creeping into the markets again? From looks of the equity market it does not seem so. Equities have been shrugging bad news coming out of Europe and slowly and steadily creeping up. In the past few days markets have generally fallen at the open, but then slowly regained its footing by the end of the day.

All this indicates that the equity market is complacent and confident that prices will rise. But in a different corner of the market, where the big boys play, traders and investors are getting risk averse. The US treasury market and the US Dollar are giving signals that the risky play of equities may be off the table. On Friday the 10-year US treasury bond prices made a new high  and the Dollar index broke a key resistance level. The US Dollar and treasuries are considered safe places to invest when the equity market is falling.

One of the key drivers of the rise in the US Dollar and treasuries was the fact that Standard and Poors decided to downgrade France and told other European countries of upcoming rating cuts. But the US treasury and dollar market have been steadily moving up for the past few days even as the equity markets continued to rally. A rallying of safe havens and equities simultaneously is pretty unusual. 

A look at the  10-year US treasury chart (click here for 10-year US treasuries chart ) tells an interesting story. The market has been making higher lows as shown by the pink arrows and also notice that the prices made a new high. The same is true of the Dollar index (Click here for Dollar chart ). A higher low is when the recent low in price is higher than the previous low. When prices make continuous higher lows it means that buyers are in control as sellers are unable to make new lows. So does this mean that we will see a continued rally of havens and a sell off of risky assets. Not so fast. Notice that both the Dollar and treasuries rallied high on Friday but sold off. The dollar index is back in it's resistance zone and the 10-year treasuries did come back below its previous all time high.

If both these markets close above Friday's highs next week and continue higher we could see a sell off in equities. There are however a few factors that are not in favor of the equity bears. Gold the other safe haven is not rallying with any kind of strength. The other factor is that both the US dollar, treasuries and equities have been going up in tandem over the past few days. This does not happen usually and completely skews the risk-safe haven inter-play, leaving analysts scratching their heads.

On Friday, however the risk-safe haven inter play between the markets mostly worked in tandem. As the safe havens such as the US treasuries and Dollar rallies, equities sold off hard in the US when equity markets open on Friday. Then later in day, like it always happened in the recent past, equities rallied which led to a sell off in safe haven. Gold is the only safe haven that moved along with the equities and not inversely.

Next week's price action will hopefully give a clearer sense of direction and till such time it's best not buy equities.