Oil Gains As Bonds Slump

The S&P 500 managed to barely close above the 2100 level, marking a new all-time high for this index. The small-cap Russell 2000 also ended the day at an all-time high while the Nasdaq notched a post 2000 high. Supporting the recent bull run are the Homebuilders (XHB), Materials (XLB), Tech (XLK), and Retail (XRT, RTH) sectors which all put in new highs in the past two days.

That's the good news.

On the flip side, today's small rally was accomplished on a jump in volatility. The VIX moved back over 15, the bull/bear dividing line. Also, the Dow Transports--considered to be a leader in market direction--has been lagging the other major averages. These two divergences could be a signal that the bulls are starting to run out of steam.

Today's notable highlights: Oil beginning to flow?
Two Oil & Gas Explorer etfs bested resistance levels in recent days. Both the IEO and the PXE staged island reversals on Friday which is a very bullish sign. Although some pundits are predicting a further drop in oil, the charts are telling a different story. A recent Zack's article said that "the slew of capital spending cuts by several major players in the industry will likely curb oil production and reduce global supply glut in the coming months, and thereby lead to higher oil prices." Now may be the time to begin building a position in the oil producers/explorers.

Today's notable lowlights: Bonds continue to break down
Treasuries, investment grade corporate, and muni bonds continue to slide with today seeing many representative exchange traded funds breaking secondary support levels (TLO, TLT, TLH). This is a bearish indication and may be a reflection of a pick-up in the sentiment that a growing economy will force the Fed to begin raising interest rates sooner than expected (some feel it could be as early as June).

One way to play the downside is to buy inverse bond etfs. Representing long-term Treasuries (20+ years) is the 1x inverse fund, the TBF, and the 3x inverse fund, the TMV. Representing a shorter time horizon (7-10 years) is the 1x inverse Treasury fund, the TBX. Please note that these inverse funds are designed to track one-day moves and are NOT representative of directional moves over the long term, so please exercise caution when trading them and know your risk level. If you're uncomfortable playing the short side, staying in cash on the sidelines is best the way to play bonds for now.