Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Are Bonds Hinting the Rally in Stocks Will Continue?

Stock-Markets / Stock Markets 2010 Apr 08, 2010 - 07:11 PM GMT

By: Hans_Wagner


Best Financial Markets Analysis ArticleStocks and bonds typically move in opposite directions. When bond prices go down stock prices go up. This is one of the reasons many financial advisors recommend that investors hold bonds and stocks, as they provide balance to their portfolio.

Portfolio managers will reduce their holdings of bonds when they believe interest rates will rise. Rising interest rates cause the value of existing bonds to fall. Some bond investors will adjust the term of their bond portfolio to try to minimize the negative affect of rising interest rates. Other will move some of their money to other asset classes that offer a better return such as stocks. Selling pressure on bonds will contribute to the downward pressure on bond prices.

While the stock market receives the most attention, the bond market is substantially larger. The global bond market is approximately $82.2 trillion, while the global stock market is worth $36.6 trillion. Any movement of cash from the bond market to the stock market will have a significant affect on stock prices. When bond prices fall, it encourages investors to move some of their money from bonds to stocks helping to fuel the rally. Can we use the alignment of bond prices and stock prices to help us adjust our portfolios to benefit from the rally in each?

Bond Rally Over

The rally in bond prices looks to be over. The eleven-year chart of the 10-year treasure bond prices shows the relationship of bond prices to stock prices. (Eleven years is all the further back the data is available for the 10-year Treasuries). In the middle of 2003, bond prices turned down. This aligns with the beginning of the rally in the stock market. The drop in bond prices ended a couple of months before the rally ended and we entered a new bear market. As the 10-year Treasury prices rallied, the market plunged. Then at the beginning of 2009, the rally in bonds stopped as the price of the 10-year Treasury turned down. This down trend corresponds with the rally in the stock market.

While there might be a minor support level at the 115 area on the 10-year Treasury, the downtrend in bond prices has much more room to fall. As long as this downtrend in bond prices continues, the rally in the stock market will continue. The RSI, MACD, and Slow Stochastic indicators confirm the downtrend in 10-year Treasuries. The also show the trend should continue for many more months. However, we might get a brief rebound in bond prices to the downtrend line.

Looking more closely at the 6-month daily chart of the 10-year Treasury bond prices, we can see the precipitous drop in the price that began in the last week of August 2010. A poor reception of a Treasury bond auction that week caused the fall of the 10-year Treasury along with other maturities. Almost each week we will see new Treasury bond auctions as the government must fund its large annual deficit.

With support at the 115 area, we might see a brief rally at this point back to the 117.5 area, a place that closely correlates with the downtrend on the monthly chart. If we get such a rally, it will be a negative for stocks, indicating we might pull back in the market.

Earnings Season is upon Us

Earnings season is upon us. Analysts are expecting 36% growth in earnings from 2009’s first quarter. For the market to rally, we will need to see companies beat these expectations. It should be no coincidence the last two market pullbacks of 5 to 10 percent occurred early in the earnings season. We might see the same this time around as many sectors are pricing in big profit surges that have the potential to disappoint. However, 2009 quarter was one of the worse earnings quarters making the comparison easier than normal.

Thompson expects the profit of financial companies to jump 193%, materials to leap 178% and consumer discretionary to rise 114%. This could be setting up investors for a disappointment, especially since so many people will be looking for earnings to exceed expectations. While these are huge numbers, earnings growth in the first quarter of 2009 was non-existent. It might not be that hard to meet expectations from such a low level.

The Bottom Line

Longer term the downtrend in bond prices is telling us to expect the market will trend up throughout 2010. As long as the downtrend in 10-year Treasuries continues, we can feel comfortable the up trend in stocks will continue.

Like any up trend, there will be pullbacks that offer new buying opportunities. We might be on the cusp of one such pull back with an overbought market and we are entering earnings season. Use any pull back to add to long positions form your stock watch list. It looks like the market will climb this wall of worry for longer than many think.

By Hans Wagner

My Name is Hans Wagner and as a long time investor, I was fortunate to retire at 55. I believe you can employ simple investment principles to find and evaluate companies before committing one's hard earned money. Recently, after my children and their friends graduated from college, I found my self helping them to learn about the stock market and investing in stocks. As a result I created a website that provides a growing set of information on many investing topics along with sample portfolios that consistently beat the market at

Copyright © 2010 Hans Wagner

If you wish to learn more on evaluating the market cycles, I suggest you read:

Ahead of the Curve: A Commonsense Guide to Forecasting Business and Market Cycles by Joe Ellis is an excellent book on how to predict macro moves of the market.

Unexpected Returns: Understanding Secular Stock Market Cycles by Ed Easterling.  One of the best, easy-to-read, study of stock market cycles of which I know.

The Disciplined Trader: Developing Winning Attitudes by Mark Douglas.  Controlling ones attitudes and emotions are crucial if you are to be a successful trader.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in