The S&P 500 closed out a shortened four day trading week with a massive 57 point range from peak to trough, and finished on a low note after very disappointing employment numbers and the broken record effect of a continuance of negative headlines coming out of Europe.

After trading as high as 1334.93 on Tuesday, the situation deteriorated throughout the rest of the week and the SPX closed below its 200 day moving average for the first time in 2012 (Friday close was 1278.04 versus 200 day MA of 1284.53). [Equity ETFs Breach 200-Day Average]

Volume was notably higher in the latter part of last week in equities as well, with SPDR S&P 500 (NYSEArca: SPY) trading more than 253 million shares versus 3 month average daily volume of 159 million shares. The VIX registered more than a 10% gain on Friday and closed above its 200 day moving average for the first time in 2012 as well, at 26.66.

Another indication that fear has certainly crept back into this market is the recent move in longer dated U.S. Treasury Bonds. With nearly a 6% weekly gain in iShares Barclays 20+Year Treasury Bond (NYSEArca: TLT) on enormous trading volume, it is clear that portfolio managers have been shifting assets into fixed income products, despite extremely low yields in the case of longer term Treasuries. [Are Treasury ETFs Risk-Free?]

In fact, we have cited the presence of “Bond Bears” for the past two years periodically, as they resurface from time to time, largely adding to bearish positions in TLT via options or via leveraged inverse fixed income products TBT (ProShares UltraShort 20+ Year Treasury Bond) and TMV (Direxion Daily 20 Plus Year Treasury Bear 3X). Toward the end of last week, and with consideration that short interest in longer term U.S. Treasuries still remains at multi-year highs, it felt that there was indeed a short squeeze effect occurring throughout the government bond markets given the ferocity of TLT’s rally on tremendous trading volume.

In fact, we saw heavy call volume in TLT last Thursday before Friday’s price gap up, and this is in sharp contrast to the typical flow which consists of TLT put buying and TBT call buying. It will be interesting to see in the coming week if there is carry-over in the long term government bond markets in terms of last week’s strength, or will bond bears rear their heads again and take the other side of this most recent and vicious price rally.

Finally, in relation to fixed income, our colleagues at Blackrock iShares pointed out to us last week that two high yield corporate bond ETFs, HYG (iShares High Yield Corporate Bond) and JNK (SPDR Barclays High Yield Corporate Bond) traded such heavy volume on the exchanges last week, that their combined volume accounted for 35% of the total volume in the bond market on at least one occasion last week (typically 10-15% of the volume).

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