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Crisis Confused An Otherwise Great Bond Market Signal at Trader’s Narrative

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:

S&P500 compared to roc 30 yr Tbond yield

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3 Responses to “Crisis Confused An Otherwise Great Bond Market Signal”  

  1. 1 Michael Stokes

    TN - I did a test of the two Boucher strategies that you discussed in this post (and the one it links to). Thought I’d pass it along

    Hope all is well and thanks for everything you do. I only recently got turned on to your blog, but have enjoyed it very much so far.

    Michael Stokes
    MarketSci Blog

  2. 2 Babak

    Thanks very much Michael. Look forward to your next post about this topic. Very interesting.

  3. 3 Double R

    since 1998 rates and stock market are moving together - since LTCM so having a model that takes signals from bonds to trade stocks should work only until 1998. It was the “original sin” of Greenspan, deflation in a nutshell started then

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