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

Subscribe to the RSS Afraid to Trade Feed

Follow Corey on Twitter:  http://twitter.com/afraidtotrade