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Increasing Anti-Correlation Between Stocks And Bonds

By Stock MarketsFeb 09, 2014 02:41PM GMT Add a Comment
 
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After about 4 months of very low correlation, stocks and bonds are again experiencing anti-correlation.

Recently both the SPY and TLT rallied towards their 200-day moving average, the former from above and the latter from below. Anti-correlation may persist with stocks; either continuing to correct while bonds recoup losses, or with stocks starting on a fresh rally while bonds reverse course. The condition of low correlation witnessed in the fourth quarter of last year was due to investor indecision.  

 

SPY Daily Chart
SPY Daily Chart


The rolling 60-day correlation between the SPY and TLT is shown on the bottom pane of the above chart. After a short rally in May from high anti-correlation to very low correlation, business is back to normal and during this period investors are selling stocks and naturally park their money in bonds as they are waiting to see whether this is the start of a more serious market correction or just part of normal swings and volatility.

Renewed threats of deflation in Europe and emerging market deleveraging may put more pressure on stocks in the coming weeks, and we may see a rally in bond prices, with TLT testing resistance near $114 and the SPY testing support nears its 200-day moving average at $171. This scenario will not materialize if there is a proactive move by the Fed to pause tapering for a while and this is a possible scenario in conjuction with a more aggressive stand by the ECB. But, these are things we know, and there are also things we do not know that can have an impact on the markets in either direction. Therefore, more important than correlation, technical analysis, statistics, etc. is risk and money management. This implies amongst other things cutting down or eliminating completely leverage at this point and establishing firm levels to set stops and get out just in case and before the herd does.

Disclosure: no relevant positions. Charting program: Amibroker. Disclaimer

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