SOMETHING I JUST NOTICED

This is a chart of the SP 500 weekly with the 30 Yr Bond Overlayed on top of it in Purple. One relationship that is forever joined at the hip is that of interest rates and stock prices. Money flows to where the greatest returns can be found, and you can see this graphically above. If you look at the stock meltdown of 2007 and 2008 you can see that as we neared the bottom, there was a monster rally in the 30 Yr Bond. Of course this was initially a flight to quality in the safety that Government Bonds provide. However, what ultimately happens in these instances, is that the yield on those bonds gets driven down so low when this happens, that the return on the money becomes unattractive. As a result, what typically happens is it then works it's way back into equities creating big rallies.

The opposite is equally true, when stock rallies carry on for a long time, money leaves the safe haven of bonds and pours into equities. During these times such as now, there is very little fear at all, and the price of bonds drops ( yields rise ). There again comes an uncle point where money will flow back into the higher yield area, once rates move up enough to move the relationship again back out of balance. We saw a minor case of that in the middle of the chart where I have marked Minor, and it caused a decline in stock prices. If you look at what we have now on the far right side of the screen, we have a much larger divergence beginning to develop. The price of bonds has been declining sharply in recent weeks, and this is going to spell trouble for the PPT at some point. They of course are trying to make all these things move together, which is just not possible over long time periods, and something is going to give here.

Timing the exact turn with this type of a fundamental is impossible, but it always factors into what I see as my overall view on things. These are some of the reasons why I have been saying recently, to tighten your stops on things even though it is not time to go short stocks. There are bond models that use this type of logic you can find on the web. Yardeni has a good one although I am not sure if you can find it free anymore. It compares yields of various asset classes and there uncle points in terms of inter market relationships and money flows.

If we combine this with the 18 week cycle I wrote about yesterday which is this week, we now have a couple things falling into line here. We also have the January seasonal tendency out there, so now what we have to do is start looking at price action to see if anything is brewing there.

We don't really have anything here at this point. We see price moving steadily higher, thanks Ben! What would need to happen in my world in the next couple of weeks is for my momentum indicator to move underneath it's trend line first. Next we would need to have some type of break in price to accompany that. If we were to move sideways in price over the next couple of weeks this could develop. We have to pieces in place now for something, but the price has to confirm it. Trading off fundamentals alone can leave you on the wrong side of the market for long periods of time and that is no place to be.

Watch the Bond Market carefully here. If you are a bear, hope for it to continue to roll over. That will be the end of the stock rally if it does. We are really on the border line now of what is not quite such a huge divergence between stocks and bonds to make it a no brainer. It is just getting close to that uncle point. I will cover this more in upcoming posts.