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Has anybody else noticed a decoupling of the T Bonds and equities? Our
trading system has used the Bonds to confirm our S&Ps trades for the last
twelve years with great success. In the last month or two, I've noticed
that Bonds seemed to have decoupled from the equities market and that we are
better off trading our basic S&P system without Bonds confirming.
Is this a temporary decoupling of Bonds and equities caused by the Asian
economic crisis or is it more permanent in nature?
Is this the beginning of the end of the bull move???
Pro:
Asian crisis. Possible collapse of Far East financial infrastructure.
Asset deflation. Commodity price decline. Earnings impact on US firms
caused by the aforementioned Asian problems as well as loss of export
markets (dollar inflation). Too much money (401k, etc.) chasing too little
quality. Equity prices discounting not only future earnings but the
hereafter.
Con:
Lack of final blow off to the upside. Falling interest rates (Asians
chasing US Bonds). Fairly stable economy and competitive US edge due to our
already having gone through our own financial upheaval (S&L crisis, etc.)
and industry restructuring (reengineering) during the last decade.
I'm sure there are tons of Pros and Cons that I'm too lazy to think of and
that's why I started this thread. I'm also sure that some of you have
spotted other indicators in your trading that I would never see, just due to
the fact that I only trade S&P futures and never look at Bonds, equities,
options, LEAPS, foreign markets, etc..
This recent Bond/Equity relationship change has made a major impact on our
trading results. In the last 6 weeks, our trades without Bonds are 77%
more profitable than using the Bonds. In the past, coupling Bonds with our
S&P trades has made the difference between a profitable year or a losing
year. What worries me is that maybe this isn't a new trend, but simply an
aberration. Simply a point discontinuity or as one of my kids would say, a
flea on an elephant's butt. Currently, we're still trading using the Bonds
to confirm. I'm watching our S&Ps with and without the Bonds, and I'm now
getting ready to switch over to ignoring the Bonds. However, I'm really
nervous reacting to a 6 or 10 week 'trend' versus our twelve years of
experience.
Any ideas or thoughts would be appreciated.
Regards
Guy
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