As many of us try and grasp the ever growing divergence/conundrum between
the equity markets and the Treasury market, I went off on a tangent and created
a chart exhibiting the correlation "pole reversal" that took place between
the SPX and 10 year yields after the 1998 sovereign debt/LTCM crisis. In essence,
stocks went from being anchored by an inverse correlation to yields to a positive
correlation. The reversal neatly marks what many perceive to be the break point
of the secular bear market our brave monetary handlers continue to fight today.
If history rhymes, whereas the bust is commensurate with the boom - we may
need to find two additional dislocations before we are truly free of
this bear's grasp.
With that said, file this firmly in the theoretical cycle files - although
I suspect that goes with most work attempting to explain the Treasury market
these days.
Extending further out on the theoretical continuum - by coincidence or design
(the age old question), one can interpret the above chart as having a north
to south correlation polarity and a mirrored distribution from east to west
of 1998.
Interestingly, each number corresponds to roughly the inverse balance of its
mirror. Think Pangea.
As always, stay frosty and remember that, intervention or not - the very long
term chart of yields still point to a lower low sometime in the years ahead.
This of course would dovetail into the charts above.
Although I am an active trader, I have always taken a broad perspective when
approaching the markets. I respect the Big Picture and attempt to place each
piece of information within its appropriate context and timeframe. I have found
that without this approach, there is very little understanding of ones expectations
in the market and an endless potential for risk.
I am not a stock picker - but trade the broader market itself in varying timeframes.
I want to know which way the prevailing wind is blowing, where the doldrums
can be expected and where the shoals will likely rise. I will not claim to
know which vessel is the fastest or most comfortable for passage - but I can
read the charts and know the risks.
I am not a salesperson for the market and its many wares. I observe it, contextualize
its moving parts - both visible and discrete - and interpret.
I practice Market Anthropology - Welcome to my notes.
Erik Swarts is not a registered investment advisor. Under no circumstances
should any content be used or interpreted as a recommendation for any investment,
trade or approach to the markets. Trading and investing can be hazardous to
your wealth. Any investment decisions must in all cases be made by the reader
or by his or her registered investment advisor. This is strictly for educational
and informational purposes only. All opinions expressed by Mr. Swarts are subject
to change without notice, and the reader should always obtain current information
and perform their own due diligence before making any investment or trading
decision.
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