7/26/07

Stock prices and bond yields....a reliable relationship

If you peruse this site, I have been explaining the relationship between stock prices and bond yields for some time. I like it because it is a reliable one. This is an update of what I said it would happen ..... and is happening.

a. Rising bond yields are followed by stock market corrections. Yields on the 10-year bonds have been rising from 4.50% in February and are now close to 4.80%. The typical lead from the bottom in yields to the top in stocks is about 3-4 months. And what happened?

b. The stock market is decisively declining. This is good news because the rise in yields is having its historically reliable effect of being followed by a peak in stocks. What next?

c. The decline in stock prices is followed by lower bond yields (and stronger bond prices). This is exactly what is happening right now. The time has come to make money in bonds. What next?

d. The decline in bond yields will be followed by a bottom in stock prices. The on-going decline in bond yields suggests the decline in stock prices is having the historically reliable effect of pushing bond yields lower. The decline in bond yields means that the stage is being set for the next market bottom. The bottom will happen when investors despair about the future.

More on http://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

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