About a week ago I wrote a Chart School article that highlighted the correlation between interest rates and the stock market, specifically the S&P 500 (see http://www.themeshreport.com/as-rates-go-the-rally-goes/). For a quick review, please look at the following charts:
The purpose of the above chart was to show the correlation between a drop in 10 Yr. rates and drops in the S&P. More often than not, the 10 Yr. also led the market.
This chart showed important levels in which to watch to gauge the possible future short-term direction of rates, and in turn, the stock market. Specifically, did you notice the support at 2.90?
Well, look at the next chart:
As you can see, the 10 Yr. has broken its key support at 2.90. This would lead me to believe that rates are going lower. Will the market follow? Are investors moving into bonds, thus sending rates and possibly the stock market lower?
The Tale of the Tape: After breaking through its 2.90 support, the 10 Yr. T-Note is pointing towards lower rates. In the past, the 10 Yr. has moved with the S&P 500, and a majority of the time it has been the leader. So, with rates apparently going lower, the expectation would be for the S&P 500 to move lower as well. Cutting back on long positions might be advised. Rather, short positions should be the higher probability trades.
No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!
Christian Tharp, CMT