Weekly Comparison Charts of Ten Year Yields and SP500

May 28, 2009: 2:14 PM CST

With the recent rally in 10-Year Treasury Yields (falling note and bond prices), I thought it would be a good idea to show you the trend comparisons between the Yield and the S&P 500 – it’s more aligned than you might think.

First, let’s look at the 10-Year Treasury Note Yield ($TNX):

The thing that should leap off the page at you is the tight (though not perfect) strong positive correlation between the Treasury Yields and the S&P 500.  The Yields actually had a leading characteristic to the market, and the stock market led the peak on commodities.

This is consistent with Martin Pring’s “Intermarket Model” that I follow, which hints that bonds lead stocks and stocks lead commodities.

The Yields peaked when the Federal Reserve began cutting interest rates in mid-2007.  In February 2008,  I wrote a post (that actually got published on the Huffington Post at the time) entitled “Is Fed Easing Actually Good for the Market?” which was controversial at the time but spot-on given that the market fell so precipitously in the months and years after the cut.

I purposely did not annotate these two charts so you could get a quick comparison between them.

Next, let’s take a look at a simple chart of the S&P 500:

The Stock Market peaked in October 2007 while yields peaked in July 2007.  Both began a steady downtrend that persisted until March 2009 (we will yet see if this is the actual low in the stock market).

The Federal Reserve continued to cut interest rates as the stock market slid to new subsequent lows until the Fed cut cut no more.

Notice also that the Yields bottomed in December 2008, three months in advance of the stock market’s March bottom, giving another example of the sometimes leading characteristic of yields in our immediate past.

Now, what we’re seeing is interest rates surging at the same time the Stock Market has recovered sharply off its March lows… but the yields are showing relative strength and are challenging levels not seen since November 2008.

One cannot extrapolate this relationship infinitely into the future (nor has it always held up in the past), particularly if we go into a period of stagflation or hyper-inflation (both of which would be ‘bad’ for the stock market).   Stagflation occurs when we have rising inflation in the midst of economic weakness.

I’m keeping a perspective mainly on the charts here, and allowing discussions on Governmental and Economic Policy to other websites that excel in discussing those topics.

Keep watching these interesting developments.

Corey Rosenbloom, CMT
Afraid to Trade.com

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8 Responses to “Weekly Comparison Charts of Ten Year Yields and SP500”

  1. mark Says:

    Thanks for this refresher Corey. I just discovered your site and really enjoy how you open your research to many.

  2. Corey Rosenbloom, CMT Says:

    Thanks Mark!

    I'm glad to be of assistance! Thank you for reading.

  3. blues Says:

    All I can say is American is fu**ed… We going get it both hole this time. We going to get hyperinflation with high interest rate. And this is all because of our IDIOTIC government…

    Look at this, TNX is going to break a major trend soon and FED is going to lose control of it. When bond market's dislocation hits, you can say bye bye to Kansas. People going to be questioning US of A's debt paper. Bond holder will be demanding much higher interest rate for all the DEBT that we can not repay. All the while USD is going to lose its world reserve status and will go down like a toilet paper which would cause hyperinflation…

  4. Corey Rosenbloom, CMT Says:

    Haha wish I could be as colorful in my posts!

    I tend to agree to an extent but can't really come straight out and say that. Scary stuff if the Fed does lose control.

  5. phil Says:

    Hey Corey

    Little off topic,,, have you look at a lumber chart, lumber contracts made a bottom and recently have exploded is this a early tell of housing, war can cause this kind of move but we have been at war for a long time.
    After trading through (2000-2003)sell off I take a much closer look at major commodities to give me a heads up especially after a big sell off, the big boys in the pit to tend to cut out the noise hence the early consolidation in Mr Copper before things started to heat up.—just trying to cut through the housing noise—-

    I appreciate the work in blog and twitter,,,best city on the planet behind you
    Phil J

  6. blues Says:

    “Scary stuff if the Fed does lose control” Yup you got that right, why do you think sales of guns and ammo has gone through the roof?

  7. Steve Says:

    Hi Corey,

    Great site. Over here in the UK, time-zones give me a bit of a.m. catch-up time re the US market. You've become a 'must-read' no matter what else might get missed on a busy morning.


  8. Steve Says:

    Hi Corey,

    Great site. Over here in the UK, time-zones give me a bit of a.m. catch-up time re the US market. You've become a 'must-read' no matter what else might get missed on a busy morning.