Let’s get right away to the point: bonds are sending a huge warning to the market.
Our stance has been bullish for stocks, as explained recently, in particular over the weekend in 4 out of 5 risk indicators flashing green, one hurdle before stocks move to all-time highs. That one hurdle, in our view, is the bond market, which is sending a very strong message today.
Bonds with longer term maturity dates, i.e. 5 years and longer, are all hitting all-time highs today. We include the charts of 5, 10 and 30 year bond notes, courtesy of Finviz.
Today’s strong move in the bond market should not be ignored. This can lead us to invalidate our bullish view on stocks, although our other indicators seem to be more than ok. How so? The key ratio in intermarket analysis is the bonds to stocks ratio. As clearly shown on the next chart, that ratio is now confirming its long term breakout. We had the impression that this move would likely be false, similar to the one in 2012 (red circle), but this time is clearly different.
We can imagine that the sell off in crude over the last 2 trading days has been weighing on stocks, given the correlation between both assets which we haven proven in this article. If crude sets a higher low, then we would continue to hold onto our bullish outlook for stocks. If crude continues its sharp decline, however, the S&P 500 would be moving towards the 1600 area. Stay tuned.