The recent high correlation between stock prices (SPX) and bonds (TNX) have many investors worried as stocks and bonds tend to move in opposite direction. The basic premise is stocks and bonds can't both continue to trend higher in the same direction. That is, one of the two asset classes must eventually revert back to its historical norm. Since the bond market is a much larger market than the equities market, and fixed income investors are predominately conservative and less susceptible to speculative buying it is believed the bond market may be a better proxy of the economy and risk aversion sentiments. Well, it appears that in the past year the upper end the range has been 0.95 to 0.99 (strong positive correlation) and the lower end of the range has been -0.82 to -0.87 (strong negative correlation). So what is the recent high correlation (0.97) between stocks and bonds telling us? SPX and TNX are currently moving together to the point where it is not sustainable, at least on a near-term basis. When these two markets begin to diverge, it may be an indication of the next pivotal trend change in the financial markets.
Chart courtesy of StockCharts.com
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