the stock cycle versus the bond cycle two cycles out of phase with one another

MTA Educational Foundation University Course – Technical Analysis of the Financial Markets ©2007

Lecture 8 - Intermarket Analysis1

This lecture series is produced by the Market Technicians Association

Educational Foundationbased on the detailed class notes

of Charles D. Kirkpatrick II, CMT Copyright © 2007.

All rights are reserved.

The Stock Cycle versus The Bond CycleTwo cycles out of phase with one another







The Stock Cycle versus The Bond CycleIn terms of prices, bond prices seem to lead stock prices







The Stock Cycle versus The Bond CycleBut, stocks lead interest rates. Remember: interest rates = the inverse of bond prices







The Stock Cycle versus The Bond CycleIt is easiest to understand the relationship referring to stock prices and bond prices







The Stock Cycle versus The Bond Cycle







Phase 1: Bonds up, stocks down

When the economy is weak, bonds usually do better than stocks for a while because the earnings environment is poor.

Phase 2: Bonds up, stocks up

Then stocks start to move up because lower interest rates get investors to buy in anticipation of an improved economy and, therefore, better earnings.








Phase 3: Bonds down, stocks up

Later the economy is actually strengthening, with increased credit demand and improved pricing, and earnings are rising.

Phase 4: Bonds down, stocks down

Eventually, higher interest rates cause investors to be concerned that economic activity and, therefore, earnings will soon weaken.








Hypothetical Business Cycle Showing Peaks & Troughs

Source: “Technical Analysis Explained,” Martin Pring*Gold - used as a proxy for all commodities

B

B

S

S

G

G

Expansion

Recession

B = Bonds

S = Stocks

G = Gold*







Interaction of Financial Markets During a Typical Business Cycle

Bond Market

Stock Market

Gold*

Business cycle trough

Business cycle peak

Source: “Technical Analysis Explained,” Martin Pring*Gold - used as a proxy for all commodities







Four Markets:Stocks, Bonds, Commodities and Currencies

S&P 500

30-Year Treasuries

CRB Index

US Dollar Index







Bonds and Stocks Move in the Same Direction Some Times and in the Opposite Direction Other Times

S&P 500

30-Year Treasuries

StockCharts.com







CRB Index

30-Year Treasuries

Treasury Bonds and the CRB IndexIn the post 2002 bull market, rising commodity prices were not translated into inflation in the U.S.

StockCharts.com







CRB Index

US Dollar Index

The U.S. Dollar Index and the CRB Index Usually Move in Opposite Directions

StockCharts.com







Gold

US Dollar Index

Gold and the U.S. Dollar Have a Strong Inverse Correlation

StockCharts.com







Utility Index

US Treasuries

Treasury Bonds and the Dow Jones Utility Index Tend to Move in the Same Direction

StockCharts.com







Cyclical Stocks Compared to Consumer StocksThe Rising Ratio Indicates Cyclical Stock Outperformance

Morgan Stanley Cyclical Index

Morgan Stanley Consumer Index

Ratio: Cyclical ÷ Consumer

StockCharts.com

the stock cycle versus the bond cycle two cycles out of phase with one another

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