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Wednesday, December 10, 2008

TNX Dropping

The TNX gapped up this morning, but has been dropping and looks like it wants to fill the gap. If it does and bounces up, we should be in good shape. If not, watch for another sell off later today.


Anonymous said...

Im fascinated with intermarket relationships and Im trying to understand relationship between the 4 major asset classes.
So let me get this straight, from what Ive read on your blog, when the bond yeilds go down, people are buying treasuries because of some catalyst like (__________). So the money thats going into bonds is coming from equities , causing them to go down. I think this is right so far. Now if the Dollar drops because of some currency debasing policy like (___________________), then equities rally because its cheaper to buy them with a foreign currency. So what you lose in dollar purchasing power you make it up in equity appreciation. Kind of like a zero sum gain. Unless of course if you have neither, then your screwed. The relation between commdities and the doillar I understand, unless were in a deflationary environement. In this case as commodities go down because of lack of demand. On top of all of this, Im guessing the trick is to figure out which one of the asset classes will be affected the most by macroeconomics to set off the strongest cause and effect relationship to override any other relationship that maybe going on. (ie. even though the dollar is dropping making equities cheap to buy, earnings are dropping at a faster pace , erasing any gains in equites made by a dropping dollar. Does this make sense?
Any feedback would be great.
Again thank you for taking the time to answer my questions. My hope is to sometime in the future have this intermaket business down cold.
Eddie B

David said...

Hi Eddie,

While my focus is on the equities market, I follow 3 other markets to try to get clues about where equities are going. The treasury market is usually a good indicator, because is yields are dropping, that means money is flowing in, mainly because investors percieve that equities are risky at the time. It is not always an exact correlation, and the behavior in the treasury market the last couple of weeks has been very strange. Still, when the yields on the 10 year and 30 year treasuries drop, the market usually follows. Notice today that the SPX followed the TNX fairly closely all day. The bond market closes an hour earlier than the stock market, so the SPX no longer was being lead by treasury yields in the last hour of trading, and it rallied. I also follow commodity and currency markets, mainly the dollar, because they also give some clues about where the market will go. It is not always an exact correlation. For instance, during the spring rally, the market rose when oil rose, until oil hit about $130, then it started to collapse. As oil peaked and started dropping, the market rallied a bit again, then during the Sept-Oct crash, both dropped. Now there is a correlation between oil and the market, both going up and down together, and that depends on what the dollar is doing. It's a pretty complex relationship, and it changes all the time. I would like to get it down cold, too, but i don't know if that is possible given the constant change.

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