The S&P has been going up for 12 weeks with little or no pullback. As the markets head toward the final days of the quarter, profit-taking is in the air. Longer-term, the question is whether the sustained run will resume. One indicator that has gotten a lot of attention lately is the long-term relationship between bond and equity yields, as we mentioned in yesterday's post, with the positive implications for equities of a reversion to the mean. "This is one of the main reasons for the very bullish forecast by Goldman Sachs this week," MTS IM Pro member "Springheel Jack" says in his blog. Yet this correlation may not be as reliable as it was in the past, he writes:
Yes … but. This rather brings to mind the monetarist experiments in the 1980s. The correlation between the money supply, inflation and output became briefly fashionable then, and policymakers in the UK and US started targeting monetary levels, rather than interest rates, as a tool for controlling the economy. What they then discovered was that the correlations that had been stable until then became unstable as soon as they tried to control the money supply directly. Clearly bond yields are being centrally planned at the moment to a very large degree and this past correlation is therefore somewhat doubtful as a predictive tool. I'm not saying that the correlation will vanish, but there has to be a significant possibility here that it will.
The other thing to mention is that the obvious example of similar policies being tried over a long period is in Japan over most of the last two decades. There are two points worth noting there. Firstly the policy in Japan has entirely failed to deliver either stock market rises or growth, with the Japanese economy in a two-decade depression and the current stock market value, after a huge rally, slightly less than 75% below the 1990 high. The second point is that even after twenty years of almost uninterrupted failure, policymakers there have yet to seriously consider abandoning this policy, which is something to consider. Anyone still clinging to the hope that the Fed policymakers have good forecasting skills should really read this articlehere. It might be that the events of the last few years have sharpened them up a bit, but it's worth noting that, as with Japan, the response to the crisis they blindly created in the run-up to 2007-9 has been to massively expand on the same policies that led to that crisis.
Thanks to "Jack" for this post and for the many excellent charts he shares with the MrTopStep IM Pro room. Each of the experienced traders in the MTS chat room brings a unique viewpoint based on his or her methods, and the lively exchange of comments, levels and trade ideas creates a synergy that improves everyone's bottom line.
It's 5:30 am and the SPM is down .30 handles at 1388.70, crude is up 51 cents at 105.86 and the EC is trading 1.3255, up 67.
In Asia 6 out of 11 markets closed higher (Hang Seng down 1.1%).
In Europe 8 out of 13 markets are trading lower.
The main headline: "World Stocks Mixed Ahead of U.S. Housing Data"
Today's economic and earnings calendar: New home sales; the Fed's Lockhart and Bullard speak; earnings from Darden Restaurants.
Conclusion: Counting today, there are 6 trading days left in the first quarter. We highly doubt that the markets will not have at least a few up days before the quarter comes to a close. We lean to selling the early morning rally and then buying weakness.
As always, keep an eye on the 10-handle rule and always use stops.
VOLUME: 1.68mil ESM and 8.5k SPM traded
SPREADS: SPM/SPU spreads tradedFV: S&P +2.20 , NASDAQ +7.00
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.