Trading Into The Giant Jaws Of Death : Bonds vs Equities

Jaws of death is a term coined by trader Larry Williams that describes when a situation when equities are rising while bonds are weakening.

Williams observed a phenomenon that happens when equities and bond prices diverge. According to him the disparity (which B  he calls the jaws) between the two tends to snap shut, hence he called the entire phenomenon the jaws of death. Usually the snapping shut action is achieved by a rapid and sharp drop in stock prices according to his model.

Because I like the name and idea so much. I decided to do up my own hybrid jaws of death chart. In this case, bond yields (not price) against the S&P 500.

I like to interpret it this way. Equities have traditionally been the antithesis of bonds and when equities rise, bond prices (yields) should fall (rise).

Presenting my very own Jaws Of Death !

Notice the 2 blue circles for 2004 and 2006, where the bond yields were high and stocks were relatively worse off. The baby jaws snapped shut quickly after.

This chart has not been normalized which means that the axes are not drawn to 2 different scales. For illustration’s sake, it should suffice.

Now look at the right of the chart. That is where we are now.

One big giant Jaw waiting to snap.

When ?

When QE runs out if Romney wins ? When the US tips the fiscal cliff ?

Not to worry. The Megaphone pattern shows another leg up in the S&P before the fatal crash. (love the terminology here)

My question is. Without US treasuries to save us, where can we run ?

For there is no other asset class larger than US treasuries left. Corporate bonds will suffer when stocks fall. Gold ? which does not fair well in deflationary environments.

No wonder China is anxiously building her giant Spider’s web and Singapore will be the Last American Hero ?

I am long Gold, SDS US (double short S&P 500) and intend to buy TBT US (ultra short 20Y bonds) or PST US (ultra short 7-10Y).