U.S Bond Yields Point to a 40% Rise in SPX

By: Donald_W_Dony

Over the last 10 years, the yields on the benchmark U.S. 10 year Treasury bond have foretold the path of the S&P 500.

Money flow trends between the bond market and the equity market, over the past decade, have given investors a heads-up on the trading direction of the S&P 500.

The swings toward fixed income (2011 to mid-2012, 2014 to mid-2016, Q4 2018 to mid-2019) have produced higher bond prices and lower yields as money managers balance safety and risk.

The results play out on the S&P 500 with flat contained performance.

During more bullish times, managers sell bonds, increasing their yields, and buy more equities (risk) with the resulting rally in stocks (Chart 1).

From mid-2012 to early 2014 and from mid-2016 to late 2018, the S&P 500 soared on average over 45 percent in about 18 months!

In chart 2, the price action for the S&P 500 now appears to be to breaking out once more.

The benchmark equity index has broken above the twice tested resistance level of 2930-2945 range and gone to a new all-time high of 3000.

Bottom line: The movement between bonds (safety) and equities (risk) over the last decade can provide considerable information to investors of what kind of price action is likely going to develop.

With a decline in yields (and a rise in bond prices), investors should expect a flat range-bound stock market.

However, when yields are rising (and bond prices are falling), investors should expect more favourable conditions for equity markets.

At present, the S&P 500 has broken out of a multi-month consolidation and has now printed a new all-time high. This suggests that bond yields will start to rise and bond prices will decline.

If past performance is a guide, we would expect a sizable advance from the S&P 500 over the next 18 to 24 months.

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

COPYRIGHT © 2019 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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