Peaking Bonds Signal Impending Market Correction

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It is necessary to understand what equity, debt, forex and commodity markets are signaling. I highly recommend reading John J. Murphy’s Intermarket Analysis as you will better understand the intermarket correlations and relationships. You will be in a better position to identify market tops, bottoms, reversals, leading asset classes, and other factors that improve your analytical visibility.

 

As I covered in TNX v. DJIA- Intermarket Analysis, bonds lead the stock market. Its not necessary that we look for stocks to follow the same script as bonds. However, once we identify certain patterns in bond yields, we can use this knowledge to expect and be prepared for certain events in the stock market.

 

As shown in Figure 1, the double top has bearish implications for the stock market. I might be reading early into this. This may even be a consolidation phase after which bond yields may resume their previous uptrend. However, I’ll stay on the neutral-bearish side for the moment.

Figure 1

 

You cannot pinpoint the time when stocks will reverse. However, you will be ready for the reversal. For instance, if liquidity is an issue, then you can start by reducing your bullish exposure. Or if you can wait till you see a confirmation of a retracement, then you can make the most of the bullish rally and then change your stance to either cash or shorts.

 

-Sanjeet Parab

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