Hi all,
I'm looking at the intersection of two charts here:
SPY (S&P 500) on top
US10Y-US02Y (10 year bond yields minus 2 year bond yields) on bottom
Red vertical lines indicate historical reversal areas
White diagonal lines indicate RSI divergences
Blue path indicates inverse correlation between the two charts
The inverse correlation between bond yields and market growth is widely known, specifically regarding when the difference between these bond yields turns negative (when the 2 year yield is greater than the 10 year yield).
1. What's the expected outcome?
This difference is currently negative and rapidly decreasing at what I believe to be an unsustainable rate. Both at the end of the dot com boom and the housing boom, bond yield deltas increased rapidly from negative back to 0 and from 0 up to peaks of around 2.5%. During these rapid increases, the S&P dropped roughly 50% before stabilizing.
2. How can we tell when one of these events might happen?
Before these events occurred, major divergences were visible on the monthly RSI noted by the white diagonal lines in '00 and '07. Bond yield deltas either decreased or reached similar lows but with decreasing momentum than the previous drop, bringing the oscillator below 30 once then back to the normal range and decreasing again (but this time not reaching the oversold area of <30). This is a major bullish reversal signal but only has been relevant once bond yield deltas are negative. After this signal was present, there was a period of roughly 4 months for the '00 event and a very generous 14 months for the '08 event to take advantage of the impending downtrend. Subsequently, a major bearish reversal signal was present on the S&P chart where the RSI signal line returns from the overbought area of >70 to the normal range then has one final weak push upward to test the moving average and remained below 70.
Although RSI is a very powerful tool, it's best used in conjunction with other indicators (just like anything else). My other indicators are a combination of the 75 and 400 day moving averages (DMA), which I found by looking for reversal signals and areas of support in the past decades going back to the '80s. Each time (x3) the 75 DMA dipped below the 400 DMA and rejected it, the price with it downwards until a bottom was reached. Bounces could reliably be predicted when the 75 DMA remained above or touched the 400 DMA.
3. How long will this pullback last?
I have no idea. That's the real answer. But(!) just eyeballing it, it looks like the pullback could go well into 2023 and maybe even into mid 2024 before stabilizing and returning to growth.
I hope you enjoyed my analysis and that you will provide some feedback. Thanks!
I'm looking at the intersection of two charts here:
SPY (S&P 500) on top
US10Y-US02Y (10 year bond yields minus 2 year bond yields) on bottom
Red vertical lines indicate historical reversal areas
White diagonal lines indicate RSI divergences
Blue path indicates inverse correlation between the two charts
The inverse correlation between bond yields and market growth is widely known, specifically regarding when the difference between these bond yields turns negative (when the 2 year yield is greater than the 10 year yield).
1. What's the expected outcome?
This difference is currently negative and rapidly decreasing at what I believe to be an unsustainable rate. Both at the end of the dot com boom and the housing boom, bond yield deltas increased rapidly from negative back to 0 and from 0 up to peaks of around 2.5%. During these rapid increases, the S&P dropped roughly 50% before stabilizing.
2. How can we tell when one of these events might happen?
Before these events occurred, major divergences were visible on the monthly RSI noted by the white diagonal lines in '00 and '07. Bond yield deltas either decreased or reached similar lows but with decreasing momentum than the previous drop, bringing the oscillator below 30 once then back to the normal range and decreasing again (but this time not reaching the oversold area of <30). This is a major bullish reversal signal but only has been relevant once bond yield deltas are negative. After this signal was present, there was a period of roughly 4 months for the '00 event and a very generous 14 months for the '08 event to take advantage of the impending downtrend. Subsequently, a major bearish reversal signal was present on the S&P chart where the RSI signal line returns from the overbought area of >70 to the normal range then has one final weak push upward to test the moving average and remained below 70.
Although RSI is a very powerful tool, it's best used in conjunction with other indicators (just like anything else). My other indicators are a combination of the 75 and 400 day moving averages (DMA), which I found by looking for reversal signals and areas of support in the past decades going back to the '80s. Each time (x3) the 75 DMA dipped below the 400 DMA and rejected it, the price with it downwards until a bottom was reached. Bounces could reliably be predicted when the 75 DMA remained above or touched the 400 DMA.
3. How long will this pullback last?
I have no idea. That's the real answer. But(!) just eyeballing it, it looks like the pullback could go well into 2023 and maybe even into mid 2024 before stabilizing and returning to growth.
I hope you enjoyed my analysis and that you will provide some feedback. Thanks!