dereckcoatney
Short

Bonds Absolutely Do Not Confirm Today's "Rally"

TVC:SPX   S&P 500 Index
Bond yields absolutely did not confirm today's "rally." Despite the markets moving up, treasuries were bought. As demand for bonds increases, the price of those bonds goes up, which lowers the yield each bond returns (less interest "returned" for each dollar invested).

Thus, despite the equity market's gains today, which have the appearance of a "risk on" environment, bonds are telling us this is a "risk off" environment.

Unfortunately for the bulls, the bonds end up being right. A great example of this is at the beginning of the year's highs, during which bonds diverged from equities and continued to move lower. This divergence was warning us of a market correction:


In fact, bonds have been telling us that this entire rally off the March lows is nothing but a bear market rally because they have in no way confirmed the move:

Comment: A good example of bonds not confirming a bear market rally is 2008, leading up to the collapse of Lehman Brothers. As equities continued to rally, bonds were warning us in advance by diverging and going lower:


This is a bear market rally, and don't let anyone fool you into thinking otherwise.

Comments

This kept me from closing my puts.
+2 Reply
Said the same thing in my post today. Lots of mixed signals in today’s price action.
+1 Reply
Bonds are always right. VXX still elevated at about 32 even after an 8.5% decline today. Definitely risk off, but probably not tomorrow either. I'll be adding some shorts Thurs, and paring down long rentals prob before then.
+1 Reply
The spread between the two have widened since 2009. It is absolutely incredible, and something has to give. Both the 10 year and Gold are sending so many warning signs. Has the market changed fundamentally? Has the FED figured out something a century of policy makers could not? After 10 years you begin to wonder...
+1 Reply
Excellent little lesson for me. I appreciate it. Thanks!
+1 Reply
hmmmm what does one say about that bearish engulfing today on 10 years?
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So what now?
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The long-term correlation between stock prices and bond prices varies between 0.5 and -0.5. Therefore, the average correlation, independent of time, is close to zero. Generally, if you try to trade a correlation that is close to zero, your trading strategy will produce random profits, both positive and negative. It's pretty difficult to tell whether this is a bear market rally or a bull market rally, unless you have a time machine.
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Excellent analysis Dereck, I agree. Though usually right about these things, I always tend to be too early, and its tough being patient to see success when the crowd is piling into a bear market rally. Indicators like this seem to predict more long-term trends, which take patience and conviction to profit from. This indicator might also help explain why Buffet has been selling, not buying anything in 2020...
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Brilliant insight tyvm!
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