What Is The Wild Bond Market Saying About The Stock Market?

While the stock market’s decline isn’t extreme by any means, other related markets seem to show heightened fear. The correlation between stocks, bonds, and gold has been strong recently. Risk-on days see stocks & yields go up, while gold falls. Risk-off days see stocks & yields go down, while gold rallies. Today’s headlines:

  1. Double volatility spikes
  2. Stocks & bonds: part 1
  3. 30-year bond yield sinking to a new low
  4. Both yield curves
  5. Stocks & bonds: part 2

 

Double volatility spikes

Here’s how a correction usually plays out:

  1. The first wave in which the S&P goes down, VIX explodes and makes a high.
  2. But as the S&P keeps going down, VIX’s spikes make lower highs.

VIX spiked more than 15% today, just 5 days after last Monday’s spike. However, VIX’s spike set a lower high.

 

When this happened in the past, VIX usually fell over the next month.

 

However, this isn’t consistently bullish for the S&P in the short term. As I said last weekend, stock market corrections usually see more than 1 DOWN wave, even if VIX doesn’t make a higher high.

 

Stocks & bonds

The stock market’s recent decline is not extreme. However, a lot of the extremes have occurred in safe-haven markets. For example:

  1. Gold’s sentiment is high, yet it continues to rally.
  2. Treasury bond sentiment is extremely high, yet Treasury bonds continue to rally (yields continue to fall).

This usually happens when a very strong “theme” emerges. This theme can swamp contrarian indicators in the short-medium term. (The obvious current theme is “trade war”). Bloomberg captured this theme and the accompanying contrarians with:

 

Stocks have been trending upwards over the past few months while yields have completely collapsed. As a result, the S&P:10 year Treasury yield ratio has soared.

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Alpha Stockman 10 months ago Member's comment

Nicely done.