Updating the Strong Correlation in 10 Year Yield and SP500

Mar 30, 2011: 12:00 PM CST

When we think of inter-market positive relationships, most of us think of Stocks, Crude Oil, and Gold (among other commodities) as highly positively corrlated and that’s true.

What doesn’t come to mind immediately is the very strong positive correlation in the 10-year Treasury Note Yield and the S&P 500.

It’s an important relationship that traders take for granted, so let’s take a look at the current update:

The Black line is our old friend the S&P 500 index and the red line is our lesser known friend the 10-year Treasury Note Yield.

The right side of the chart is scaled in terms of Yield, wherein 30 equals 3.0% and 35 equals 3.5% in yield (this can be confusing at first).

As you can see, stocks and yield move strongly together – rising and falling at almost the exact same time.

While each little wiggle and sqiggle doesn’t line up perfectly, the general swings and trend do align positively.

We’ll see the actual price chart of 10-year yields in a moment, but the main idea is to get an update on the relationship over the last 6 or so months – namely from the September stock market bottom when Chairman Bernanke announced rumors of impending QE2, which changed the intermarket structure until the present, namely in favor of inflation.

That being said, let’s now look at the 6-month chart of 10-year T-Yield:

While stocks bottomed at the start of September, yields bottomed a month later in October and have rallied (along with stocks) non-stop except for the start of 2011 when the yield flatlined at the 3.5% region (an important number).

There was a lot of talk of yields at the 3.0% resistance but once that broke in December, it was a “no lookback” policy as the yield – and stocks – traveled higher.

February saw a big spike-up to the 3.7% area – shy of the major psychological 4.0% area – and then the yield declined in the same “ABC” format as stocks did – falling sharply during the Japan crisis situation.

Similarly, yields broke back above their key resistance levels – like stocks – at the 3.3% and 3.4% levels in a 45-degree angle move up to where we are now, back at the 3.5% region.

What levels are important to watch?

It’s going to be the dual EMA crossover at 3.4% and move important than that will be the 3.3% horizontal pivot then the 3.2% “2011 low” that was made similarly in stocks.

It goes without saying that, unless something major thwarts the strong positive relationship temporarily – stocks and yields will trend up or down together, so you can look at both markets in terms of key levels and chart expectations and IF/THEN statements (trades).

When calculating your Intermarket Analysis picture, be sure to include Treasuries/Bonds – (prices and yield) – into your work.

The bond market competes with the stock market for investor capital and serves as a “Risk Off” market (stocks are “Risk On”) – thus bond prices are inverse stocks and bond yields are correlated to stock movement – but that’s a whole other story.

Corey Rosenbloom, CMT
Afraid to Tradhe.com

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3 Responses to “Updating the Strong Correlation in 10 Year Yield and SP500”

  1. Gary Says:

    There's also an inverse head & shoulders pattern in the daily chart of TLT, which is currently finding support at its neckline.

    What's the correlation between strong employment and bonds? I would think a strong jobs number would be bearish for bond prices, but they rallied today.

    With the reversal pattern forming in TLT and today's action I'm thinking the jobs number on Fri needs to be spectacular in order to turn bond prices down.

    What do you think?

  2. Cot2150 Says:

    Longer term, the 10 Yr – SPX correlation switched from -1 to +1 during July, 1998.

    Any thoughts as to why?

  3. Cot2150 Says:

    Excellent commentary, BTW. Long time reader…