The negative correlation between T-Note curve and market has always been a good technical indicator. In the past an inverted yield curve was able to forecast a recession even some quarters ahead of the market. But now the situation is quite tricky.
In the chart you can see the daily movement of S&P 500 (black line) compared to the difference (red line) between the yield of 10 years T-Note and the yield of 5 years T-Note. From 1997 till now, you can see an inverted correlation between the two lines. Back in 1997, you can notice the red line going down untill 2000, while the S&P 500 was going up. Then, from mid 2000 to end of 2002, the red line has gone up very fast, while the market had a crash. Note that in 2000, the inverted yield curve (i.e. long term yield lower than short term yield) forecasted very well the next period of recession.
During 2003 the red line was quite stable, at 1.1-1.0, while the market was going up. From 2004 to 2007, the T-Note yield difference began to fall again, and the market kept going up. In 2007 the red line began to go up some months before the market went down: it forecasted a major market slowdown, again. During the Lehman crash the T-Note yield curve reached a top at 1.30.
But from 2009 to now something else has happened: the correlation between the two curves is direct. You can see that while the red line was going up, the black line (market) was going up too. And even now, we have a red line falling down, very rapidly, and the market is going down too! Normally, even in the recent past, when the difference between long term and short term T-Note is going down, the market keeps going up: that is why the yield curve now would call for a buy. But since 2009, this correlation has been direct: if this correlation keeps going direct, the two curves will go down together.
I can't understand what is happening and maybe you readers can help me. There could be some reasons behind this new correlation: for example the liquidity injections into the market, or the spread in world government bonds. Or maybe this fact could be related to the very low interest rates, never seen in the past. Or maybe the pessimism about the economy is so high that the T-Note is one of few safe places to invest money, and that is why the yields go down, together with the market. Readers' comments on this are really appreciated.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.