STOCK BOND RATIO UPDATE PART I: by Woody Dorsey.
The 11/29/2016 Stock Bond Ratio noted: “The Trump surge in Equities makes “Sense” in terms of the Stock Bond Ratio.” Then the 3/16/2017 update advised: “The Big Picture suggests a generic Equity High in 2018 and a Low in 2021.” Equity Upside is not totally that surprising. What was and is surprising was the lack of any interim corrections and the lack of typical two sided volatility. It would have been typical and, I expected, a corrective flush in Q3, 2017. This infers that the still unfolding degree of Equity Extreme is really of Historic Proportions. The Stock Bond Ratio is based on Psychology rather than Wall Street Rationality. When Rates are relatively, “Low” or not rising “rapidly,” Investors don’t perceive any problem. But once Rate Rises accelerate, they are recognized as a problem for equity valuation. That is inevitable but, it has not, as yet, occurred.
10 YR. WEEKLY: The 7/2016 & 9/2017 price Highs were followed by overt failures and “Told” that Rates are in a structural Bear market! When Rome finally fell, some time ago, Rates rose for Hundreds of Years! I forecast the Bond Bear market and it is already 5 years old but the Ratio has not yet triggered any acute Equity Response. As the historic “Lapdance of Liquidity” from 2009 concludes, rate rises will accelerate. Note that the 10 Yr. may now be @ the cusp of Recognition. The weekly configuration is just a fractal of the Monthly chart.
10 YR. MONTHLY: The Monthly macro fractal shows price Highs in 7/2012 & 7/2016.The sequential price failures were notable. Obvious critical support is not far away (perceived as 3%ish) but Treasuries will eventually break well below those levels. That more significant break down, when it does occur, will clearly tip the Ratio and trigger a major Stock Market decline. I will analyze the timing possibilities in Part II.
TREASURY TREMORS: The Stock Bond Ratio analysis tries to identify when Rate Rises might infect the Stock Market. This is based on both Treasury and Stock Market timing. It is not about levels or absolute price Tops. It is about a Psychological Catharsis. Equities have more upside time but some Treasury Tremors may begin at any time.
S&P MONTHLY: Stocks have been in an unusually persistent rally. Trends penultimate to important extremes often seem, “Unbelievable.” I profiled for stocks to “decline from mid-2018 into 2021.” Still in the final 5-8 months, gains often become modest. Thus, if stocks are going higher, as everyone assumes,
the surprise may be that 2018 gains will eventually become relatively muted.
STOCK BOND RATIO PART I SUMMARY: Timing Profiles allow for further Equity Strength in 2018. Treasuries continue their Bear Market and will eventually become a trigger for an Equity correction. In Part II, I will discuss the weekly profiles for stocks and bonds which may identify far more specific timing. Stock Bond Ratio Analysis is less about forecasting markets than it is about identifying time zones (not Highs,) when significant cognitive shifts may occur. I will discuss these parameters in Part II, published in a few weeks.
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