Bonds Are Expensive, Stocks Are Cheap

Includes: DIA, IEF, QQQ, SPY, TLO
by: Babak

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: