Do You Want To Anticipate The Market’s Next Move? Watch This Indicator
Below we have a daily chart that looks at the S&P 500 cash vs. the Dow
Jones 20 Bond Average.
Clearly, there is a close connection between the red line (bond
prices) and the blue line (equity index prices). Although the daily and
weekly correlations of price changes in the two markets are essentially zero,
the 60-day correlation is a significant +.46. Stated otherwise, over 20%
of the variation in 3-month stock prices can be attributed to price movement in
the bonds.Â
How do we know that bonds are affecting stocks, rather than the
reverse? The correlation between monthly price change in the bonds and next
month’s price change in stocks is +.23.Â
The relationship is worth keeping in mind as the market
deciphers the intentions of the Fed–and as bond price gains have begun lagging
those of stocks.
Brett N. Steenbarger, Ph.D. is Associate Clinical
Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical
University in Syracuse, NY and author of The
Psychology of Trading (Wiley, 2003). As
Director of Trader Development for Kingstree Trading, LLC in Chicago, he has
mentored numerous professional traders and coordinated a training program for
traders. An active trader of the stock indexes, Brett utilizes
statistically-based pattern recognition for intraday trading. Brett does not
offer services to traders, but maintains an archive of articles and a trading
blog at www.brettsteenbarger.com.
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