As we start the new year, it is well worth repeating what I wrote on October 15, 2010: "In essence, higher yields are in the immediate future, and this should have negative ramifications for equities and commodities. Trends in gold, crude oil, and yields on the 10 year Treasury are rising and this in aggregate will put pressure on equities." Equities have continued to perform better than I would have thought considering the rising trends in Treasury yields, gold and crude oil. As we start the year off, it is the same old same old. If equities rise, then Treasury yields and crude oil will do so as well, and if I had a preference, this is where I would put my money. Think of it as a tax on higher equity prices that eventually will result in an equity sell off.

Figure 1 is a weekly chart of the the Ultra Short Lehman 20+ Year Treasury (symbol: TBT). Since October 15, 2010, this 2x leveraged ETF is up 10%. (Although not quite an apple to apple comparison, the SPY is up about 8.2%.) Prices remain above support (at 36.26) and above the down sloping 40 week moving average; 44.29 is the price target.

Figure 1. TBT/ weekly

Figure 2 is a weekly chart of the United States Oil Fund (symbol: USO). Since October 15, USO is up 11%. Price is back in an nicely defined up trend channel with the next level of resistance at 41.28.

Figure 2. USO/ weekly

As far as equities, it is my belief that they are a better short here than long. Rising trends in crude oil, gold, and Treasury yields are a headwind for equities, and I have discussed this in multiple articles. (See links here, here, and here.) On November 5, 2010, the composite indicator constructed from the trends in crude oil, gold, and Treasury yields gave a sell signal for equities. Since then, the SPY is up about 4%. The MAE graph (see figure 3) for all those trades when the indicator is extreme shows that the draw down (x axis) for this particular occurrence is not excessive by any means.

Figure 3. MAE graph

In summary, I am bearish on equities, and bullish on Treasury yields and crude oil. I cannot imagine equities continuing to outperform with such headwinds, and I believe this other assets offer a better reward to risk profile.