Stocks and Bonds Appear to Be Best Friends

It’s interesting the way different markets relate to one another. Typically Treasury bonds aren’t the best friends of stocks, moving in opposite directions most of the time. There have of course been periods of time where the two have worked out their differences and advanced or declined with one another. When this happens we begin to notice a divergence that takes place between yield and equities. Since mid-March yields have been falling while stocks continue to head higher. Bonds are often considered the ‘smarter asset’ compared to stocks and when yield isn’t mirroring the move in risky asset classes it typically raises a red flag for stocks.  However, this hasn’t been the case so far this year.

Even though stocks have been hitting new highs, it has been bond prices that have been the outperformer over the last couple of months. One note regarding this couple is the momentum between the relationship of the S&P 500 ($SPX) and 30-Year Treasury Bonds seems to be waning. The RSI indicator is just about down right depressing as it makes lower highs. This type of momentum divergence has been present during just about every intermediate equity top. But none of this matters until price confirms. While it’s concerning to see the S&P overshadowed by bonds during this rally, it only becomes important when the Mr. Market says so.

Yields continue to fall and the  correlation between bonds and stocks continue to rise. Over the last 10 years the 60-day correlation between the S&P 500 ($SPX) and 30-year bonds has only been this high nine previous times. So what does this all mean? It means investors have not been shifting out of bonds and the ‘Great Rotation’ is not necessary underway. Whether you chose to blame Bernanke, Japan, or your Uncle Bubba – stocks and bonds are now best friends. It’s unlikely this courtship will last forever, normally it’s the bond boys that win out, we’ll see if this time is any different.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.