Markets are all interrelated, including the stock and bond markets. In the world of assets these two securities are the most popular with many 401ks, savings, etc invested in each. Many people make investment decisions choosing between the two in a zero sum game.
Over the past 10 years there seems to be some correlating relationship between bond yields and stock prices. As the chart shows they pretty much move up together and down together. This makes sense since there is that zero sum game trade off between the two. There is a very interesting scenario at market turning points. Bonds look to turn before stocks.
In the 2000 top, bonds topped in January and stocks in March. At the July and October 2007 stock top bonds peaked over a year earlier in June 2006. At the 09 stock market bottom, bonds had already bottomed in Dec 2008. And now, at the April highs, bonds have peaked at about the same level 4 times since May 2009. All of these situations set up divergences with the stock market. Bonds signaled turning points ahead of the stock market turning points!
What this means now is that bonds will need to make a new high above the 3.8% level in order for the stock market to have a chance at taking out its April highs. In fact the sell off since April in bond yields has been hard and fast more similar to 2007 and 2008 than any other time in the past 10 years. This is cause for concern and may tell us that the market is likely to fall from here rather than rally and make new highs. This also supports my general theory that the market is likely to continue to fall hard from these levels.
What this also means is that we should look for an upturn in bond yields before we get too excited about any stock market rally.
Good luck!
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