Bonds Are Expensive, Stocks Are Cheap

The bond market and the stock market are intimately intertwined. But how exactly they influence each other is often complex. The dynamic nature of their relationship makes it even more difficult to read the market’s tea leaves. As soon as you think you’ve figured them out, the interplay among them changes and the game starts all over again.

I’ve already described one way that I link the two together: the monthly rate of change for bonds. This is a useful indicator that has not only provided guide posts for market bottoms but also times when the market has climbed into thin air territory and is about to be humbled.

Here’s another, similar method:

click to enlarge

As the chart above shows, this is the annual rate of change for the 10 year U.S. Treasury Bonds. Since it is based on a longer time frame, it reaches extreme levels much less frequently than the monthly rate of change.

Right now, the annual rate of change for 10 year bonds is very close to reaching the historic level that has marked a top for bonds (and a bottom for yields).

Interestingly enough, each of those times was also a good time to not only sell (or sell short) bonds but also to be long stocks:

Comments

[CrossProfit:]

Very interesting, but your timing may be off a bit. The market still wants to see how Q1 2008 earnings will come in before deciding which way to go for the rest of 2008.

Until now, what we have been experiencing is more in line with a sector rotation, as in out of financials which started in mid 2007 and into some alternative energy stocks and mining for example. Conventional energy stocks were slightly 'overbought' so they aren't going anywhere fast soon.

As for the entire market rising in tandem based on valuations, well as long as there is talk of a possible recession, multiples are going to continue to come down a bit as investors would rather be safe than sorry.

Interesting correlation though!

CrossProfit

2008 Feb 13 05:18 AM