A Portfolio Manager in Chile urges:

Take a look at the 2-10 slope on the treasury curve plotted along with the SP500. The negative correlation is very high, and the last weeks rise in slope has not been followed by a fall in stock prices… yet. I don’t think combination of higher rates and prices are sustainable.

Thanks, Felipe !

Category: Fixed Income/Interest Rates, Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

76 Responses to “Relationship between the 2/10 & SPX”

  1. dead hobo says:

    BR Excerpted:

    The negative correlation is very high, and the last weeks rise in slope has not been followed by a fall in stock prices… yet. I don’t think combination of higher rates and prices are sustainable.

    That type of thinking is obsolete. Under normal economics, you would be correctomundo. Under the Obama Put, where an artificially pumped stock market is used to finance the myriad bailouts Uncle Stupid is paying for, you have to apply Bizarro Economics.

    Personally, I can’t wait for the bubble burst that must eventually happen. As I said this morning, it will probably be later than sooner. I am looking forward to hearing the official explanation and to see how the bail out will be bailed out.

  2. rob says:

    Timmy… he’s a funny guy!

    BEIJING (Reuters) – U.S. Treasury Secretary Timothy Geithner on Monday reaffirmed his faith in a strong dollar and reassured the Chinese government that its huge holdings of dollar-denominated assets are safe.

    “We believe in a strong dollar,” Geithner said in a question-and-answer session after a speech to students at Peking University.

    A major goal of Geithner’s maiden visit to China as Treasury secretary is to allay Beijing’s concerns that Washington’s mushrooming budget deficit and ultra-loose monetary policy will undermine both the dollar and U.S. bonds. China is the biggest foreign owner of U.S. Treasury bonds.

    “Chinese financial assets are very safe,” Geithner said. His response drew laughter from the audience.

    (Reporting by Glenn Somerville; Editing by Alan Wheatley)

  3. “Chinese financial assets are very safe,” Geithner said. His response drew laughter from the audience.

    What kind of laughter? The uncomfortable, nervous kind?

  4. Andy T says:

    I’m not sure how conclusive this particular chart is in determining an “inflection point.” As I look at the 2002-2003 period, it looks as if the stock market bottomed before the 2/10 rally peaked…you had an 800->1000 rally as the 2/10 slope put in it’s blow off peak…..

  5. hopeImwrong says:

    Well, if the inverse relationship holds, either stocks need to move, or bonds need to move. There is no requirement for stocks to go down.

  6. dead hobo says:

    hopeImwrong Says:
    June 1st, 2009 at 12:13 pm

    Well, if the inverse relationship holds, either stocks need to move, or bonds need to move. There is no requirement for stocks to go down.

    Unless the bond vigilantes being written about in recent days are paper tigers and wimpy noise, the red line should continue to rise. Until relatively recently, the 10 year rate was around 5%. Once Uncle Stupid runs out of money to keep buying down the rates, then look out above. 5% should be seen as a floor at that point.

    Conversely, a non Bizarro World S&P would reflect higher rates by stumbling, since one of the purposes of lower rates was to boost the housing market. Poor housing and poor auto markets combined with high unemployment and decreased consumer spending is usually considered to be a negative for an economy, except in Bizarro World.

    Higher rates might bust up the commodity bubble. A burst bubble would probably cause a sell off in other inflated assets if for no other reason than to pay for bad oil deals. At least until the next bubble a few weeks later.

  7. Rebeltraders says:

    Very good chart Barry, thank you.

  8. matt says:

    It looks like there are short term periods in which they can move together.

    Does anyone have a feel for how Joe Retail is making decisions lately? I went to a graduation party on Saturday and everyone I talked to (mostly unsophisticated people) said that they were staying out of equities. At work, I was literally called an idiot for exiting my longs half way through May. Everyone I talk to at work is putting fully paychecks into equities.

    These are mixed signals – the rednecks at the graduation party in Ohio were scared of equities. The “smart” people whom I work with in the city are diving in head first.

    I kind of feel like an idiot for leaving so much on the table by moving to cash in May. I’m still staying 70 percent cash here. (I am still long EWS, EWH, and some commodities).

  9. danm says:

    If the deflationists win, you’ll get deleveraging which will not be very good for stocks as companies will fail one after the other and the market will drop. The last man standing will get the market share and margins will increase.

    If the inflationists win, at one point credit costs will impact the economy. Costs will increase faster than revenues and many participants will get squeezed. Companies will fail which means the market will drop. The last man standing will get the market share and margins will increase.

    Same end result, different winners and losers per industry probably…

  10. karen says:

    Perhaps the single most important read I’ve come across recently, Doug Noland, “The Core to Periphery Dynamic.”
    Note, the commentary is at the end: http://www.safehaven.com/article-13466.htm

  11. franklin411 says:

    They were probably laughing a their incoming text messages. These are college students, after all.

  12. karen says:

    My stock tip of the day, DLM. I’m tempted to put a market order in for several thousand shares this second, but I’ll try to resist the temptation and hope for a slightly better entry price…


  13. cvienne says:


    Doesn’t Pelosi’s husband own millions upon millions of shares in DLM?

  14. dawase says:

    All correlation studies beg the question of causation. Here in particular it seems like the timing of the moves isn’t always the same.

  15. Pat G. says:

    “I don’t think combination of higher rates and prices are sustainable.”

    With our money and the best PPT money can buy anything is possible.

    As to Timmy in China. The government should hang their heads in shame for sending him there in order to soothe China’s worries over investments in this country and to ask them to keep buying more. What in the world has this country come to? It’s way beyond pathetic.

  16. leftback says:

    @Karen: I am sure you will be lapping that one up…

    Truly a bizarre market. David Rosenberg, Mish and Gary Shilling still like Treasuries here, which means that if they are right, another market mini-bubble will be the one to burst here. That would be the “reflation” mini-bubble.

  17. call me ahab says:


    can’t open the link- in a nutshell what is so exciting about Del Monte- outside of their green beans of course

  18. karen says:

    I see the 30 year stabilizing between 4.5 and 5.5 and the 10 year about a point lower… might get to be a very boring treasury market…

  19. leftback says:

    Gold isn’t reading the Weimar Republic memo today. Might a turn in the US $ be imminent?

  20. karen says:

    Everyone’s sense of humor is rubbish today… ahab, try copy and paste. The link does work. I’ve sent it to all the girls I know, and then some.

  21. call me ahab says:


    do you beleive there is a chance that the weakening of the $ will continue unabated- a true currency crisis underway as we speak- where the Fed would have to curtail all monetization efforts- just to keep the $ from crashing outright- and thus – the continued anti $ trade into oil and commodities?

    I’m starting to feel that is waht is happening

  22. matt says:


    I find that piece by Mr. Nolan to be a little off. He’s saying that the core to periphery dynamic has changed. I disagree. USD denominated assets are still the place that money flows when a crisis brews. That’s why we saw the dollar go straight up in 2008.

    If the dynamic ever changes, what you will see is hard assets go straight up during a crisis.

  23. I-Man says:

    Way too quiet around here today… whats the dealio?

    Cute Karen, cute. I didnt authorize anyone to use my likeness (ex-dreads) on a popsicle though…

  24. Mannwich says:

    Wow, quite the panic buying extravaganza today. This is quite the spectacle.

  25. call me ahab says:

    nope- not in my office- that is no go-

    rubbish- please explain- that is very foreign sounding word to me- British possibly?

  26. Pat G. says:

    @ leftback

    Consolidation my man. Nothing has changed.

  27. karen says:

    Matt, Noland said, “It is, however, my view that the dynamic of powerful Core to Periphery flows has resumed.” You might want to re-visit his commentary. He has been singularly right for many years.

  28. AmenRa says:

    10 year note trading at 3.70% and yet we are having a rally in equities. The only other explanation is the rebalancing of the Dow. ISM is still contracting (at a slower pace) and PCE increase due to stimulus. Also, China will concentrate on short term bonds once Geithner leaves.

  29. leftback says:

    The $ is approaching September levels, not far above last June’s levels. In the long run, the $ is headed lower. But it’s hard to believe that we will not see a $ rally soon. The 30-year mortgage rate is definitely something that BB has his eye on here. If push comes to shove and they have to choose which market to save, they will simply have to choose Treasuries. In my view there is no way they would stand by and watch a full currency crisis develop. As long as they are able to intervene to prevent calamitous market moves, they will.

  30. Andy T says:

    This is one of the downsides of following very simplistic and overused indicator like the 200 day moving average. The simple 200 day moving average came in at 927, which was snapped on the open, thus triggering a lot of short covering by everyone who sold into that M.A. The 200 day EMA comes in 944.50….interesting moment.

    If that was a “triangle” that we broke out of (and it sure seems like it was), then the thrust from 887 should be limited to 75-125% of the maximum width of the triangle. This max level is 951.50. If 951.50 doesn’t provide resistance, then it wasn’t a typical triangle and we’re likely going to push into the 960s.

  31. I-Man says:

    @ AT:

    What say ye of SPX 943… the January high… (1/6)?

    Kind of spooky how that matches up with the 200 day EMA of 944…

  32. karen says:

    Guys, the spx isn’t the only index that “broke out.” Look at the $wlsh (today) and $nya (friday). $tran is getting close! and if it breaks out, it’ll give the dow theorists a lot more confidence to buy this market. Just trying to keep your eyes open to the obvious…

  33. leftback says:

    It’s going up, Karen, yes we can see that, and it’s also a SQUEEZE. The only thing that isn’t obvious is the top.
    Anyway, LB is going to stock up on ice lollies for the summer – in case the Golden Girl needs to cool off in NY.

  34. Andy T says:

    I-Man…I think it’s all real spooky….I can feel an inflection coming, but must admit I won’t trade it seriously until it shows at least some signs of weakness….still short via small amount of Puts on Sep futures and it has been getting smaller every day! I added on a little more today at 944. Still regard it as a very docile position for now…. a slow bleed.

  35. call me ahab says:

    the money quote from Karen’s post @ 12:52-

    “A robust Core to Periphery Dynamic and the re-emergence of dollar vulnerability are a potent combination. U.S. markets to this point remain sanguine with the prospect of an expanding Federal Reserve balance sheet rectifying any spike in interest rates. But currency markets are no doubt increasingly fixated on our propensity to monetize our massive debt. At some point, increasingly unwieldy flows out of our currency may force the Fed’s hand. The scenario where the Fed is forced to choose between loose monetary policy and currency crisis could be a potential big negative surprise for U.S. markets.”

    now we know why Geithner is over in China- begging them to continue purchaing our debt- if we monetize- the more the $ will sink- the more we are headed for a currency crisis

  36. leftback says:

    I bet they are showing Tiny Tim the interest rate charts on their screens at this very moment….
    Don’t be surprised to hear some Maximal Strong Dollar Jawboning on Geithner’s return to Washington.

  37. AmenRa says:

    @Andy T

    The S&P still needs a close above 968 (monthly) to reverse the current down trend. Until then the higher daily and weekly closes makes it easier to reverse the current up trend. But that’s just me.

  38. call me ahab says:

    maybe the $ will not be defended at all- maybe devaluation of the $ is the tradeoff to reflate other assets

  39. Onlooker from Troy says:


    Yep, the ultimate in short sighted strategy. Fits right in, doesn’t it?

  40. I-Man says:

    Financials sure are rolling over…

  41. Onlooker from Troy says:

    Sure are I Man. REITs and banks going downhill. Overall market hardly feeling it though.

  42. call me ahab says:


    I noticed that- any ideas?- maybe because the Fed’s hands are about to be tied?

  43. I-Man says:

    Probably just an illusion to create the illusion that this tape aint being painted.

  44. Onlooker from Troy says:


    These guys are just SO FULL OF CRAP. It’s all so pathetic, ain’t it? Later this year when oil’s at $100 or more again Obama’s gonna be over in Saudi kissing the Prince’s ass like Bush did. Maybe a walk in the garden holding hands.

    We’re just junkies begging our dealers for another cheap hit.

  45. I-Man says:

    @ Mistress:


    Beware the false breakout.

  46. Onlooker from Troy says:

    Rumors about a JPM secondary. May explain the financials weakness.


    But really, does anybody not expect it? We’ve had a ton of new stock sold lately and it’s barely registered so far. I guess there may end up being a limit, someday.

  47. leftback says:

    Gradually moving from short-term Treasuries to long-term Treasuries as the curve steepens.
    That was Dr Hussman today.

    We agree, in fact. We like to buy what nobody wants – on the grounds they’ll probably want it later.

    I-Man: Do you have a Mistress we don’t know about?

  48. call me ahab says:

    re announcement for a strong dollar- lftbk sure called that one- must have these schmoes figured out-

    what makes it surreal is that there are calls for a strong dollar w/ no ammunition to back it up- in fact just the opposite- everything we are doing furthers a weaker $

  49. Onlooker from Troy says:

    SRS rampin’ up. Maybe the hyperventilating frenzy is over for the day, at least. Sucks to have bought IYR at 36 today.

  50. Onlooker from Troy says:

    Exactly ahab. It’s all just such transparently empty rhetoric. It’s downright insulting.

  51. I-Man says:

    @ Left:

    Same Mistress as you young brotha… the Mistress of the Stick. :)

    Funny you should say that though- Mrs I-Man sure is jealous of this mysterious karen who trades and talks charts… I’m beginning to think she’s lurking on here just waiting to bust my rasta ass…

    @ Mistress:

    For real tho Karen- I appreciate (and admire of course) your tenacity at sticking with the trend (the obvious) and printing mint in the face of all of us ignorant top calling trend faders fighting the Fed and Govie Sachs. I am not a hater of your success… know that.

    We’ll probably be carried out on our shields while you are being paraded as the Victorious Queen of the Reinflation Bubble of 09.

  52. leftback says:

    All they have to do in order for the $ to get stronger is to stop weakening it. Deflation has been taken off the table, inflation is now baked in the cake (via energy), it’s time to take the foot off the gas with the QE talk here.

    @Onlooker: I imagine the only people who bought IYR at 36 were “involuntary buyers”.

  53. thetanman says:

    Nolan has been writing about the finance bubble for years. It took years for him to see the results, but they happened just as he said they would: of course only the timing was in doubt. When people say there were no more bubbles to blow, Nolan articulated why that was SO wrong. We have the government finance bubble, and then the World wide consumer debt bubble to go. Only then will there be no place to turn. Every time you read him just skip to the bottom, although in the lead up to the crash you could see the various #s ballooning. And then they ballooned some more. Try reading the last 4 weeks or so, he has been expanding on his thesis, and you’ll have a good idea what this is all about.

  54. Onlooker from Troy says:

    Good point re: IYR. And Cohen & Steers has been trying to hold up the whole sector singlehandedly. It’s a do or die effort for them.

  55. NamNam says:

    Something should roll the markets soon. Maybe Ben on Wednesday?
    You better not be IN when Ben is talking :)

  56. Onlooker from Troy says:

    Oops. Spoke too soon. IYR catching a bid again.

  57. leftback says:

    Cohen & Steers are going to go down in flames – in the equity market even the perception of an oncoming freight train is enough to kill the REIT stocks. People are arguing that CRE will not crater until 2010. But the CMBS are already tanking. By the time the train wreck actually arrives, game over. [See: GM, for example].

  58. call me ahab says:

    I wonder what bad news will effect the market at this point- a bad unemployment figure- non-farm payrolls- my guess is they would need to be pretty grim for the market to give a shit

  59. drollere says:

    this is a true “say what?” moment among the BP commentariat.

    1. this is just graphical description by another method. among the uncountable number of (highly correlated) econometric and market statistics, putting one chart over another is a meaningless exercise. what’s your market argument here — “all graphs that fit, must continue to fit forever”? really?

    2. tell me why the linkage between SPX/treasuries should reflect the same underlying causes prior to 2008, when pretty much everyone was all in (big margin, high leverage) in stocks, bonds and real estate (real or indexed), as opposed to after 2008, when pretty much everyone is sitting on huge piles of cash and risk is the new reality? that is, would a higher spread really “suck cash” out of the stock market, at current levels?

    3. isn’t the basic story that the spreads go up either because stocks are more profitable, or inflation is more likely? why can’t both be true in this situation?

  60. drollere says:

    forgot one …

    4. the chart cited shows that SPX/treasures *run together* for at least a year after the bottom in late 2001. to answer felipe’s question, “how long” — “dude, for at least another six months!”

  61. leftback says:

    Ah yes, those mythical huge piles of cash…. and what about those huge piles of debt that need to be rolled over?
    Have you compared yields between the S& P 500 and the 10-year note lately? Stocks were a good deal. In March.

  62. DL says:

    VIX was up 3% today. Very unusual considering how strong the market was today.

  63. DL says:

    Sold my OIH today. Now hoping for it to pull back about 8% or so.

  64. leftback says:

    Sold PBR. Still have a bit of ACI and WFT along with my core longs: COP VLO and DBA. Amazing run.

    Jesse has some nice TA charts today. Also I was reading this:

    Momentum traders have contributed to dollar weakness? You don’t say?
    Anti-dollar sentiment is now extreme. Look for the turn, and remember, THERE IS ONLY ONE TRADE.

  65. Andy T says:

    O mistress….what say ye’ about the DX daily candlestick?

    It has elements of a hammer bottom to it, though one would have like to see more of a shadow below. However, it did open near previous days lows…most of the price action action was below the previous days price action and the market then recovered near where it opened…definitely the elements of hammer bottom.

    A potential doji star bottom at least….need an up day tomorrow to confirm…..

    The Loonie and Euro hung somewhat nasty sticks on the board…Yen looked real bad….but the Sterling still looks ok as it still seems like a heavily shorted/hated currency.

    Next 24-48 hours will be important for currencies….in determining whether or not we get a reversal in the dollar.

  66. leftback says:

    AT: Hope you’re right about the hammer bottom, because LB’s bottom was certainly hammered today.
    G’night, all.

  67. karen says:

    Andy, look at UDN as well. the $usd candle I’d call a bullish hammer… and taking the last 3 together.. seems like a stalled pattern… it has been a long run down for the dollar… the uup candle could turn into a morning star if we get an up day tomorrow. it’s gotta be a tired trade… like crude which further flayed me alive today, lol.

    Congrats to DL on his OIH : )

  68. karen says:

    Andy, the tail is plenty long here:


    and this is the ino chart that looks rather stalled to me:


    it’s been a cr*p shoot.. and 66 didn’t cap crude..

  69. Onlooker from Troy says:

    Let’s hear it for the hammer! Dollar rally-bring it on! What’s more American than that?

  70. Mike C says:

    We’ll probably be carried out on our shields while you are being paraded as the Victorious Queen of the Reinflation Bubble of 09.

    Just for the record, I’m in the “bear market rally” camp and don’t think this is the beginning of a multi-year bull like 03-07, but I suspect this thing is going to run longer and higher then some of the gloom and doomsters could have ever anticipated, and many who were sitting on nice profits in late Feb/early Mar will indeed be carried out on their shields bemoaning government and Fed “manipulation”. It is one thing to “be wrong”. It is another to be stubborn and “stay wrong”


  71. I-Man says:

    What kind of bothers me about that hammer AT is the absence of volume… kind of glaring.

    You still hanging with that DTO Karen? I’ve been watching it for a short term long entry… that Ahmadinejad Call still has me gunshy tho.

    I think the Israelis are getting ready to throw a punch, but thats just speculation of course. Question is… are they going to throw a punch before or after crude corrects 10%?

  72. I-Man says:

    @ Mike C:

    And since those are my words amigo- let me just qualify them by saying that I was not short this thing until April 29th… just in case you’re implying from my statement that I’m in some kind of “gloom and doomster” club. OR that you’re assuming that I’ve been a bear and short this whole time.

    As per:

    “It is one thing to “be wrong”. It is another to be stubborn and “stay wrong”…

    I couldnt agree more… but have I been proven wrong… with conviction? Decidedly, No.

    Not trying to call you out- but if you use I and I words to make a point, you ought to just check the context of the I that spoke them.


  73. Mike C says:


    just in case you’re implying from my statement that I’m in some kind of “gloom and doomster” club. OR that you’re assuming that I’ve been a bear and short this whole time.

    I was not, and I apologize if it came across that way. That said, I read enough of the comments on an ongoing basis to know there is definitely a “gloom and doomster” club here. I remember them saying S&P 300-400 was just around the corner when we dropped below 700. Like I said before, bulls make money, bears make money, but pigs get slaughtered. You gotta know when to take some chips off the table.

    We’ll get there on this bullish run as well but the S&P is still not ridiculously expensive on any sort of normalized valuation along what Hussman, Grantham, Shiller does. Frankly, the people looking at a trailing multiple on earnings or a forward on 09 have no idea on valuation whatsoever. The value of the S&P doesn’t come from 1-year’s earnings but all the future earnings over the next couple of decades. Are S&P earnings really going to stay at 08-09 levels for the next 30 years? There are some people thinking they are doing some incredibly incisive valuation analysis to come up with their 400 target which is just as nonsensical as the bulls in 07 looking at a multiple of peak earnings.

    One of my favorite monthly reads out today:


    Shorter version: Don’t stand in the way of a freight train.

  74. seneca says:

    Doesn’t everyone know that, by and large, a steep yield curve is BULLISH for stocks and a flat yield curve is BEARISH? Where’s the puzzle? The yield curve is steepening and stocks are rallying. That’s the way the markets are supposed to work! To see this relationship, you need decades of data, not the 9 years shown in the chart.

  75. jc says:

    The biggest industrial company in the country fails and we celebrate with a 220 pt rally. Everything is”the bottom”.