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Tracking the 10-Year Note: Indicator Hitting All-Time Low Says Stocks Will Hit All-Time High


Buy stocks, be neutral on commodities, and sell bonds.

On December 15, I wrote an article that noted that the 252 daily Rate of Change (or ROC) decline on the 30-year bond yield was at the 0.2% percentile (see Indicator at 0.2% Offers Clues to Direction of Bonds, Stocks and Commodities). The only times the ROC was lower stocks went up over 40% in less than 16.5 months. One potential problem of this indicator is the 30-year bond was re-instated only in 1977, and no new 30-year bonds were issued from February 14, 2002, to February 8, 2006. The 10-year note has a much longer track record. So this article will examine the times the yield dropped dramatically on the 10-year note and see what happened next.

The data we will look at has daily yields from 1962 and end-of-month yields from 1925. We will sacrifice a bit of the precision of the daily data and go for the robustness of the 1925 data. So we are looking at times when the 10-year note dropped a lot over a rolling 12-month period.

As it turns out, all of the biggest drops in yields for the 10-year note happened post 1981. There were no times in 1925-1976 or 2002-2006 when bond yields dropped a lot.

Another important point is this indicator hit an all-time low on January 31. So we have an all-time extreme in an indicator that goes all the way back to 1925. Now if you look at the above table, you will notice some of the instances were marked by green and bold. The top 20 instances were congregated in eight groups. In order to avoid redundancy, we will look at the times the indicator was closest to the January reading (i.e., the lowest in each group). For this study we are looking at end-of-the-month prices and yields. What we will do now is look at how various assets acted after those dates.

This indicator says bond yields should continue to go up for months.

This indicator suggests stocks will go up at least 38% from their January 31 levels. This equates to 1312.41 * 1.38 = 1800. Yes, we are talking about 1800 on the S&P, which would be an all-time high. Also note the shortest remaining duration of the bull was one year and five months, which projects into June 2013.

As you can see, commodities are more of a hit-and-miss affair. In the No. 2 (2008), No. 3 (1986) and No. 4 (2003) readings (the current reading is No. 1), commodities went up 24%, and the rallies all lasted two years and three months. However, the next couple of readings were not as good. So this indicator is not as bullish for commodities as it is for stocks. However, every time bond yields dropped 29% in a rolling 12-month period, commodities rallied. So this should give the commodity short-sellers a reason to pause. In summary, this indicator suggests that one should buy stocks, be neutral on commodities, and sell bonds.

Data from
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No positions in stocks mentioned.
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