The correlation: Bond yields indicate SPX CORRECTION
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US treasury yields and the S&P 500 have a positive correlation. The two usually move lockstep to a certain degree and when they diverge, they don't stay divergent for too long.
This time, however, at the beginning of 2019, the divergence occurred and has continued for nearly 12 months now.
The idea behind the correlation is that bond prices are typically inverse to the equity prices, due to the yield of bonds being related to the SPX.
From darkest blue to lightest: 30-year yield, 10-year, 5-year.
The area at which the divergence began, the S&P 500 gained over 25% while bonds fell about 35%. This leaves us with three alternatives.
1. The S&P 500 corrects 50% to catch down with the bond yields (least likely)
2. Bond Yields for the 30, 10 & 5Year all rally 50% (not likely)
3. The two meet somewhere in the middle. Meaning bond yields rally 15-25% or so, while the S&P 500 drops 10-15%. (a most likely scenario)
This time, however, at the beginning of 2019, the divergence occurred and has continued for nearly 12 months now.
The idea behind the correlation is that bond prices are typically inverse to the equity prices, due to the yield of bonds being related to the SPX.
From darkest blue to lightest: 30-year yield, 10-year, 5-year.
The area at which the divergence began, the S&P 500 gained over 25% while bonds fell about 35%. This leaves us with three alternatives.
1. The S&P 500 corrects 50% to catch down with the bond yields (least likely)
2. Bond Yields for the 30, 10 & 5Year all rally 50% (not likely)
3. The two meet somewhere in the middle. Meaning bond yields rally 15-25% or so, while the S&P 500 drops 10-15%. (a most likely scenario)
Nota
Disclaimer: This trade idea is for educational purposes exclusively, this does not constitute investment or trading advice. TRADEPRO Academy is not responsible for any market activity.
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