Thursday, October 27, 2016

Stock/Bond Correlation

There is little opportunity out there.  If you lose a lot of money in this market, you will be stuck in a hole for quite a while.  This is a not a market to try to make comebacks.  This is a market to either avoid or trade lightly.  I am speaking from a longer term trader's perspective.  I am sure the daytraders still have some mean reversion setups that they can rely on in this kind of chop.  But from those looking to catch moves that last more than a couple of days, this is horrible.

The stock market usually rallies the week before the election, so it is probably about time for the seasonal players to come in to try to catch an up move.  But there is very little upside from here.  Not with central banks unwilling to stay aggressive if the market goes higher.  Rallies are now just traps set up to bring out hawkish Fed/ECB talk.  And this market is just not strong enough to withstand that talk.

We may soon be entering a rare period when stocks and bonds go down together.  There has been a notable change in the market tone in the bond market, with rallies quickly dying out and with dips lasting longer and longer.  That is despite a flat stock market.  Without QE in Europe, these bond prices are not sustainable.  That is what this price action is telling you, as the fears of ECB tapering will not go away despite whatever Draghi says.  Unlike 2013, the economy is too weak and stocks too overvalued to withstand such a rise in bond yields without it affecting stocks.  If we get a taper tantrum, it will affect stocks, and not for just a few days like 2013.  The correlation between stocks and bonds will get close to 1.

Bonds continue to get crushed and we have a healthy gap up in the S&P today.  I don't believe this rally lasts.

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