After An Extremely Rare Move In Bonds, How Have Stocks And Bonds Performed In The Past?

When investors are concerned about future economic outcomes, they often migrate toward more defensive-oriented long-term U.S. Treasury bonds (TLT). The recent surge in demand for defensive bonds caused an extremely rare and extended look on the monthly, weekly, and daily charts of TLT. TLT closed above the upper Bollinger Band on all three charts (monthly. weekly, daily) on May 31, 2019. Therefore, it might be helpful to know the following: (a) how many times has this occurred in the past, (b) what happened over the next two years in the bond and stock markets, and (c) historically, after such a rare extended bond market condition, which major asset class provided the better risk-reward profile in the historical cases?

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Since finding simultaneous monthly, weekly, and daily closes above the upper Bollinger Band for TLT was so rare, we also performed similar studies to better understand historical tendencies in cases with larger and more meaningful sample sizes. Thus, we addressed the questions above by studying three data sets (n = 10, n = 18, and n = 51).

STUDY ONE: MONTHLY, WEEKLY, AND DAILY

The first case is extremely rare. Since TLT historical data is limited, we also used VUSTX as a proxy for TLT. Data for VUSTX dates back to 1986. Thus, all three studies cover data going back to 1986. We examined data for approximately 8,349 trading days, assuming a typical year has 253 sessions.

You can make an argument that pushing TLT above the upper Bollinger Band on monthly, weekly, and daily charts speaks to a somewhat overextended market, especially from a short-term perspective. How did bonds perform following such a rare extended condition? Over the next 90 days, the extended market tended to take a break, posting negative average and median returns. How many trading days featured simultaneous monthly, weekly, and daily TLT/VUSTX closes above the upper Bollinger Band? The answer is 10 trading days. What happened next in the bond market?

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How did the stock market perform after bonds hit an extremely rare and extended trifecta? Historically, quite a bit better than bonds. Rather than posting negative average and median returns looking out 90 days, stocks posted green figures.

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Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit ...

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