My system for using interest rates and oil to predict the market
In yesterday’s
posting, I took a look at the close intraday relationship between T-note
yields and the S&P 500 market.
Specifically, when note yields have
risen (which means that the prices of notes are declining), the stock market has
tended to rally. When note yields have fallen (rising note prices), the
stock market has been under pressure. My interpretation of this
relationship has been that it is mediated by price changes in the crude oil
market. When oil prices have jumped, this has raised fears of economic
slowdown. Although this pressures stocks, it is positive for note prices,
since it promises lower inflation–and less need for Fed tightening–down the
road. During the last two days, when oil prices have risen by more than 5%
due to the impact of the hurricane, keeping a keen eye on oil and notes has
helped S&P traders stay on the right side of intraday swings.
My statistical work bears out these relationships. From January, 2003
through August, 2005 (N = 665), we have had 382 days in which the T-note futures
have been up in price and 283 where they have been down. The average
four-day S&P 500 futures price change following an up day in the T-notes has
been .11% (208 up, 174 down), while the average four-day change following a down
day has been .27% (169 up, 104 down).
Over that same period, we’ve had 377 days where the two-day price change in
crude oil futures has been up and 288 days where it has been down. The
average five-day S&P futures price change when oil has been up has been .07%
(200 up, 177 down), while the average five-day change following a two-day drop
in oil has been .42% (180 up, 108 down). Given that the last two days have
seen a rise in oil and note prices, recent history suggests subnormal returns
over the next week. As a discretionary trader who nonetheless utilizes
statistical work to gain an edge, I will be looking for sell setups intraday,
all else being equal.
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.