Thursday, May 31, 2007

When Yields Are High, Should We Buy?

We had an interesting situation on Thursday in which both the price of the S&P 500 Index (SPY) and the ten-year Treasury yield hit 40 day highs during the session. Rising rates have been the bane of many a bull market, but how have they affected prices recently?

I went back to 2004 (N = 819 trading days) and examined what happened in the S&P 500 Index following rising vs. falling 40-day periods in the 10-year yield. When the yield has been up over the past 40 days (N = 398), the next 40 days in SPY have averaged a gain of only .12% (206 up, 192 down).

When 40-day yields have fallen (N = 421), the next 40 days in SPY have averaged a healthy gain of 2.54% (326 up, 95 down).

What that tells us is that much of the rise of the recent bull market is associated with periods of falling yields. This, in addition to the tepid participation in the recent rise, is a reason I'm not chasing current highs in U.S. equities.


David said...

Just out of curiousity... any sign of a current 'safe haven' effect with money leaving asian stocks for the US?

Instead of your typical top being put in when the retail crowd gets pulled in it could be the asians playing that role this time around.

Frank said...

Hi Dr. Brett,

Great Work and Great book! I don't know if you also look at the COT chart, but have you notice the COT chart for S&P500? It seems lately Commercial has finally turn net long and it seems they are buying the dip? If they are the 'Smart Money', why did they get in the 'long' side trade so far up in the bull run? It seems they were pretty much net short throughout the bull run since Aug 2006. Do they expect the bull run for much longer period? Or is this bull run the result of short squeeze of the commerical shorts?? Also during the last dip of the indicies, they 'long' more S&P 500 but 'short' more DOW?? Even as of last week, they seems to be still net short of DOW (unless I read the COT chart wrong?)

Anyway, like you, I feel all the technical (and some current fundamental) just does not justify the continue bull run. There were divergences all over different indicies on weekly chart all the way down to 15 minutes chart when S&P500 hit 1532 last week. But I guess it didn't matter, the bull just keep charging ahead. Maybe is this type of dis-believe that keeps this bull alive? Maybe human psyche trumpt all technical indicators...?


Brett Steenbarger, Ph.D. said...

Hi David,

I don't have any data specific to this issue, though I do think money flow in Asia ETFs might be interesting to track.


Brett Steenbarger, Ph.D. said...

Hi Frank,

I can't comment on the COT data; I don't utilize it myself. I do believe we'll need to see weaker money flows into stocks before those divergences translate into meaningful corrections.


Kevin said...

Hi Brett, how are you?

Your work is excellent as always.

I just posted a chart on my blog which shows how bonds have been leading the S&P500 by about 10 weeks. The correlation seems to be pretty accurate.


Brett Steenbarger, Ph.D. said...

Great post Kevin! Here's the link (since Kevin is too modest to post it himself!):

I'll also link in my weekend update. The bond-stock relationship is very worth tracking here, IMO.