The Stock Cycle versus The Bond Cycle Two cycles out of phase with one another
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Transcript of The Stock Cycle versus The Bond Cycle Two cycles out of phase with one another
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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
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MTA Educational Foundation University Course – Technical Analysis of the Financial Markets ©2007
Lecture 8 - Intermarket Analysis2
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 CycleIn terms of prices, bond prices seem to lead stock prices
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MTA Educational Foundation University Course – Technical Analysis of the Financial Markets ©2007
Lecture 8 - Intermarket Analysis3
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 CycleBut, stocks lead interest rates. Remember: interest rates = the inverse of bond prices
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MTA Educational Foundation University Course – Technical Analysis of the Financial Markets ©2007
Lecture 8 - Intermarket Analysis4
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 CycleIt is easiest to understand the relationship referring to stock prices and bond prices
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MTA Educational Foundation University Course – Technical Analysis of the Financial Markets ©2007
Lecture 8 - Intermarket Analysis5
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 Cycle
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MTA Educational Foundation University Course – Technical Analysis of the Financial Markets ©2007
Lecture 8 - Intermarket Analysis6
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.
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.
The Stock Cycle versus The Bond Cycle
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MTA Educational Foundation University Course – Technical Analysis of the Financial Markets ©2007
Lecture 8 - Intermarket Analysis7
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.
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.
The Stock Cycle versus The Bond Cycle
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MTA Educational Foundation University Course – Technical Analysis of the Financial Markets ©2007
Lecture 8 - Intermarket Analysis8
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.
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*
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MTA Educational Foundation University Course – Technical Analysis of the Financial Markets ©2007
Lecture 8 - Intermarket Analysis9
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.
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
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MTA Educational Foundation University Course – Technical Analysis of the Financial Markets ©2007
Lecture 8 - Intermarket Analysis10
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.
Four Markets:Stocks, Bonds, Commodities and Currencies
S&P 500
30-Year Treasuries
CRB Index
US Dollar Index
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MTA Educational Foundation University Course – Technical Analysis of the Financial Markets ©2007
Lecture 8 - Intermarket Analysis11
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.
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
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MTA Educational Foundation University Course – Technical Analysis of the Financial Markets ©2007
Lecture 8 - Intermarket Analysis12
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.
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
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MTA Educational Foundation University Course – Technical Analysis of the Financial Markets ©2007
Lecture 8 - Intermarket Analysis13
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.
CRB Index
US Dollar Index
The U.S. Dollar Index and the CRB Index Usually Move in Opposite Directions
StockCharts.com
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MTA Educational Foundation University Course – Technical Analysis of the Financial Markets ©2007
Lecture 8 - Intermarket Analysis14
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.
Gold
US Dollar Index
Gold and the U.S. Dollar Have a Strong Inverse Correlation
StockCharts.com
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MTA Educational Foundation University Course – Technical Analysis of the Financial Markets ©2007
Lecture 8 - Intermarket Analysis15
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.
Utility Index
US Treasuries
Treasury Bonds and the Dow Jones Utility Index Tend to Move in the Same Direction
StockCharts.com
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MTA Educational Foundation University Course – Technical Analysis of the Financial Markets ©2007
Lecture 8 - Intermarket Analysis16
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.
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