Trader’s Narrative

It wasn’t that long ago when people were running around pulling their hair out because of a swift sell off in the bond market. As yields spiked in the 10 year and 30 year notes, a lot of attention was invested in trying to explain what this meant.

In early July I showed one simple indicator based on the 10 year Treasury Notes and how it has a very good record of finding market tops - something most indicators are loath to do.

Here is the indicator again, going back three years:

As you can see, this is able to not only find tops, but bottoms as well. Whenever the rate of change of the 10 year T-Notes drops into negative territory, we start to see a high probability of the equity market bottoming. It isn’t perfect, as you can see. It missed the October 2005 bottom (or was early depending on how you want to think about it).

The rational argument is that as bond yields fall, equities become more appealing compared to bonds. And so funds flow from bonds to stocks. Although not simple, it is both logical and fairly consistent. What else can you ask from an indicator?