Going back to the end of November 2007, the bond market was giving a great signal that a rally in the equity markets was about to unfold. From the time I wrote about it to its top in December 2007, the S&P 500 Index gained 100 points (1410 to 1510). That may not seem like much in today’s topsy turvy market. But you have to remember that back then the VIX was at ~20.
The idea is that the rate of change in the bond market has a bearing on the equity market. I first read about this in Mark Boucher’s book, The Hedge Fund Edge where he outlines dozens of similar ideas.
Put simply you buy when the rate of change in the 30 year bond yield is less than or equal to 9% and sell when it is above that level. The performance for this simply system is impressive. Equally impressive is that doing the opposite isn’t profitable. This is a sign that we aren’t data mining but dealing with an inherent relationship in the financial markets.
I use a variation of this system, however, the most recent signal didn’t work and I suspect it had to do with the craziness that we’ve seen in all financial markets:
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