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Indicator at Levels Only Seen Near the Epic 1932 and 2009 Stock Market Lows


Every time this indicator was at these levels, stocks went up 35% within 16 months.

MINYANVILLE ORIGINAL Since October 6, there have been quite a few indicators (such as the ARMS Index, the 30-year bond and its 52 week rate of change, the 10-year note, and bond yields) that have suggested stocks will go higher. Today we will look at yet another one. The indicator is the Long-Term Corporate Baa Yield/10-year US Treasury Note Yield ratio.

As always, we will go back as far back as the data will allow. The 30-year bond was reinstated in 1977. The monthly 10-year data starts on January 31, 1925. We will use the 10-year as the extra data allows this indicator to go through the mother of all stress tests: The 1930s.

The most recent monthly reading (July 31) of the Baa/10-Year Yield is 3.21. This is the second highest reading in its 1,051 month history. That equates to the 99.9% percentile. Here is a list of all the months it closed in the 3s:

Within three months of the February 28, 2009 monthly stock market low. February 28, 2009 is the lowest monthly close from November 1996 to the present day. While the market went down big for another two months after the indicator's peak, the market is still up 57% from the December 31, 2008 signal.

Over the last three months, note that the market is up at least 1.26% in each of the last three months.

July 31, 1932 was the second lowest monthly close the S&P has had since the 1800s. The lowest was the previous month (June 1932). From its July 31, 1932 close, the S&P went up 52% in 38 days. It then had a series of bear and bull markets. By March 6, 1937, the S&P had tripled from the July 31, 1932 signal.

As you can see, there have been two other spikes that culminated in a peak above 2 on the chart. Let's take a look at those for good measure.

April 30, 1938: 2.43
This was the lowest monthly close on the S&P from May 1935 to November 1941. The S&P went up 42% over the next six months and nine days in a bear market rally.

September 30, 2002: 2.05
This was the lowest monthly close on the S&P from May 1997 to January 2009. The S&P went up 93% over the next five years and 11 days.

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The stock market always went up at least 35% within 16 months. This would equate to the S&P hitting 1800 by November 30, 2013. Furthermore, the stock market went up at least 42% before the bull market/bear market rally ended. That equates to 1958 on the S&P.

In summary, this is yet another indicator that suggests that one should have a substantial stock allocation in their portfolio.
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