Here’s how rising rates can be bullish…
On my research blog,
I noted that, as of the close on Thursday, we were up sharply on a two-day basis
in both 10-year interest rates
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PowerRating) and gold stocks
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a rise in both of those markets was associated with bullish prospects in the
S&P 500 Index
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PowerRating) four days out. One thing I noticed, however, was
that the bullish bias was not as great since 2005 as it had been in 2003 and
2004.
That got me thinking: Perhaps the stock market is responding less favorably
to rising rates than during the days we were worried about deflation.
Normally, of course, rising rates pose threats to the economy by dampening
demand for loan activity, especially hurting the housing and financial sectors.
In a sluggish economy, however, rising rates may reflect growing economic
strength and actually be welcomed by the stock market. Tracking how stocks
trade in the face of interest rate movement tells us a great deal about the
hopes and fears of market participants.
For my analysis, I went back to March, 2003 (N = 749 trading days) and found
128 occasions in which 10-year Note rates rose by 1.75% or more in a two day
period. When this occurred during 2003 and 2004 (N = 89), SPY was higher
four days later by an average of .48% (55 up, 34 down). This is
considerably stronger than the average four-day gain for SPY of .25% (433 up,
316 down) for the sample overall. It thus seems, at least in the short
run, that rising interest rates were associated with favorable S&P 500
performance.
Since 2005, however (N = 39), large two-day rises
in rates have led to an average four-day gain in SPY of only .10% (23 up, 16
down)–less than the four-day average overall. While we are not responding
to rising rates in an outright bearish fashion, neither are rate rises
associated with favorable stock performance. Are we witnessing a
transition in market cycles, from one in which rising rates are viewed as signs
of economic vigor to one in which rising rates also connote a threat of
inflation and economic slowing? In coming weeks, I will be carefully
tracking the shifting correlation between bond and stock markets for clues as to
the mind of the market.
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 commercial services to traders, but
maintains an archive of articles and a trading blog at www.brettsteenbarger.com
and a blog of market analytics at www.traderfeed.blogspot.com.
He is currently writing a book on the topics of trader development and the
enhancement of trader performance.