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Guy,
Do you have access to back issues of Barrons. Specifically take a look at July
28, 1997 - "What's Different Now", an interview with James Paulson of Norwest
Investment Management.
He talks about the relationship between bond and stock returns and inflation.
Basically he observes that as the economy reaches a level of stability (ie
inflation tends towards zero) stocks and bonds become decoupled. He even goes
on to explain that they can even move in opposite directions particularly when
faced with the threat of deflation. He claims that an inverse relationship
between stocks and bonds has prevailed about 20% of the time since1926. There
is alot more to the article and it makes a good read.
(Guy, If you need a copy of it, let me know and I will send or fax it to you).
This stock/bond decoupling topic is also addressed in the most recent issue of
Nelson Freeburg's Formula Research. In fact, this issue is dedicated to
intermarket trading research.
Regards,
Essan.
Guy Tann wrote:
> 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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