The Ultimate Bear Chart, by the Northman Trader

You don’t have to be an expert in technical analysis to recognize from the chart below that the ratio of the Standard and Poors Index over the ten-year Treasury bond yield has decisively moved below a long-term trend line. Treasury yields are moving up relative to stocks, which last week moved down. The ratio may be forming what’s called a head-and-shoulders formation. If the trend continues it means interest rates will continue moving up and/or stock prices will continue moving down. From the Northman Trader at northmantrader.com:

“There are two bubbles: We have a stock market bubble, and we have a bond market bubble” – Alan Greenspan January 31, 2018

This may not come as a surprise, but: I agree with him. Oh I know, every time Alan Greenspan says something related to “irrational exuberance” immediately the comments come that he said it in 1996 and stocks didn’t blow-up until 2000. While that may have been true then it didn’t invalidate his premise nor is the timing relevant to now. Back then people ignored him and went full bubble mode until it popped.

Indeed this one may still go on for a while and 2018 upside risk targets remain despite this week’s first pullback action of 2018. However this week’s corrective move coincided with a sustained technical breakout in the 10 year yield above its 30 year trend line. Markets clearly reacted and not favorably.

Which brings me precisely to the relationship between stocks and bonds. If Alan Greenspan is correct then a chart I have been watching and musing about for a while may be the ultimate bear chart.

I’ve shown this chart before, but let me walk you through the theory of it.

This is a ratio chart of $TNX (10 year yield) vs the $SPX and yields a stunning picture:

The correlation is stunning to me from a technical perspective. Why? Because it is so incredibly precise.

Indeed, if Alan Greenspan is right, this chart could have enormous implications for the next few years. This chart could suggests a massive multi year bear market to emerge.

Let me explain why and how.

The ratio bottomed right near the 2008/2009 lows and, as you can see, we’ve seen a continued rise until the middle of 2016. In the years in between a trend line established itself that acted as precise support until the US election. That’s when everything went pear shaped.

Since then the trend line became resistance and the renewed effort to break above it rejected precisely at the trend line again in 2017. Given this history it seems hardly a coincidence, but rather suggests a technical relationship of importance.

Currently we see the ratio dropping hard this week. Why? Because stocks are falling and yields are rising. Which means that for this to move back higher yields must drop and stocks rise. Or at least yields need to stop rising.

To continue reading: The Ultimate Bear Chart

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One response to “The Ultimate Bear Chart, by the Northman Trader

  1. A massive multi year bear market? How would he describe the last 16 years? Greenspan should put his talents to better use by predicting the number of marbles in a goldfish bowl. This man has predicted 18 of the last 3 corrections.

    Like

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