In early June I stumbled on a promising indicator for finding market tops. As a student of the markets I’ve desperately searched for a reliable tell for tops. But for the most part the prey is elusive.
Market bottoms are much, much easier to find than tops. The VIX index pops, the put call ratio spikes, sentiment goes haywire, and on and on. There are literally dozens and dozens of indicators that one can line up as good signs of a market bottom.
The indicator that I mentioned involves the interplay between the stock market and the bond market. As the rates in the bond market rise, the stock market usually suffers because money starts to flow out of equities and into less riskier (and higher yielding) bonds. And vice versa.
It is simply, the 30 day rate of change of the 10 year Treasury Bond yield. When it approaches 9% (or more), the stock market tends to get weak. Especially when immediately prior to the signal it has been on an uptrend.
This is what we had in early June 2007 and so far, the signal has been good. I suppose we could argue whether the June high water mark is truly a “top” or whether it is simply a pause. To really know, we need more time. Still, one can’t argue that entering at that time wasn’t a good idea since it wouldn’t have made you any money. In fact, exiting to preserve capital seems to have been rather smart.
Of the major market proxies, the Nasdaq composite is the only one that has surpassed its early June highs. The Russell 2000 Small Cap index, the Dow Jones, and the S&P 500 have all traded within a range.
But I’m still rather bullish for the intermediate to long term time frame. I’ve shared with you a few reasons for that. Most recently, the remarkable Commitment of Traders report, the short interest ratio and finally the total apathy from retail investors. The fly in the ointment continues to be the flacid financials.
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