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Inter Market Analysis

Inter market analysis is a series of articles studying related segments of the market to identify lead lags between trends in each segment. This can often forewarn you of impending changes in trend and allow for planning of required action based on it. For example midcaps v/s large caps, currencies v/s commodities and US markets v/s European markets and so on. In a global environment inter-market relationships are not restricted to a country but between countries and their respective asset classes as well.

TBills

Tbills again[130] - this one is not going away in a hurry. I am showing why. Last weeks jump in yields came with a break of a one year long H&S formation, which has a target of 125. Lower prices means higher yields maybe another 25-50 basis points higher for US yields before its done this move. So dont expect the knee jerk reaction to rates to go away soon.

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The 10 year T note yield chart shows the yield target closer to 3% from 2.15% today. Chart courtesy marketwartch.com

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Bonding with Equities

The Popular media goes a good job of popularising inter market relationships but without a good chart we can loose sight of what is happening. Yesterdays chart of the Nifty and USDINR was one such example. Today I explore another.

The US 10Y Treasury notes [inverted Yield chart] along with S&P. For long the two held an inverse correlation so when stocks peaked in Y2K, T-notes[TNs] bottomed. As TNs moved higher the S&P was falling and this inverse relationship continued till after the 2008 crisis. The chart below is a quarterly chart to stay focused on long term trends. After 2009 however you can see that both the S&P and TNs are going up. This is where it get interesting because the media has been telling you that investors are buying bonds and selling equities. But at large both have gone up.

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The reason people are confused is that the inverse correlation still exists but in a smaller weekly degree. In other words. Both were heading up together but in alternating bouts of buying/selling. This is seen in the second weekly chart below. So since June 2012 equities are falling and TNs are going up.

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But nothing goes on forever. And early signs based on my wave counts and sentiment indicators for TNs and long term momentum indicators as the quarterly momentum shown below rolling over to a sell are indications that bonds may be in a downtrend. I have shown the TN chart several times recently highlighting this. So the big question takes us back to the first chart above. If bond prices now start a long term decline would equities be far behind? Are US equities about to start a longer term decline or correction along with TNs/bonds, however inversely correlating in the medium term. TNs can often have a slower unwinding process but each stage might bring with it 'Interest rate shocks" for the US or now correlated world markets.

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TBills

10 year T bills fell, as yields go up. It fell below the channel and neckline I have been discussing. A little hint from Ben is all it took and then the markets were already ahead of him on this one. It indicates higher interest rates for bond yields around the world. In short this is not good for equities.

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