Over the last decade, US Treasury Bond yields have generally moved with the S&P 500. That connection appears to have tighten over the last 12 months. And as the outlook for the US equity index is for higher levels in 2013, so is the forecast for bond yields.

In 2012, US Treasury Bond yields moved back in-line with the S&P 500 with over an 80% correlation rate (Chart 1).

Investors are continuing to be shift out of defensive securities (bonds) and into growth (stocks). This movement is keeping the two assets in an increasingly close connection.

The outlook for the S&P 500 is to maintain a strong bullish trend into mid-year. Fuelled by massive central bank stimulus programs and earnings growth, the US index now appears set to retest the 13-year barrier of 1550-1570 in Q2 (Chart 2).

With the recapture of 1500 level, models are now pointing toward a new target for the S&P 500 of 1625-1650.

Bottom line: Both US bond yields and the S&P 500 are expected to continue advancing into Q2. 10-year Treasury Yields are projected to increase by 0.80% and the US index by 125 points.

By Donald W. Dony, FCSI, MFTA
www.technicalspeculator.com

COPYRIGHT © 2012 Donald W. Dony
Donald W. Dony, FCSI, MFTA has been in the investment profession for over 20 years, first as a stock broker in the mid 1980's and then as the principal of D. W. Dony and Associates Inc., a financial consulting firm to present. He is the editor and publisher of the Technical Speculator, a monthly international investment newsletter, which specializes in major world equity markets, currencies, bonds and interest rates as well as the precious metals markets.

Donald is also an instructor for the Canadian Securities Institute (CSI). He is often called upon to design technical analysis training programs and to provide teaching to industry professionals on technical analysis at many of Canada's leading brokerage firms. He is a respected specialist in the area of intermarket and cycle analysis and a frequent speaker at investment conferences.

Mr. Dony is a member of the Canadian Society of Technical Analysts (CSTA) and the International Federation of Technical Analysts (IFTA).

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