Watching Bonds Today to Trade Stocks

This morning Wall Street is covered with news vans and giant satellite dishes. Its obvious that there is a lot going on today so I want to keep this short and sweet:

The negative correlation between Stocks and Bonds has been very clear. Stocks go up with Bond yields as the prices of those bonds go down. The opposite has also been true. The chart above shows the iShares Barclays 7-10 Treasury Bond Fund vs the S&P500. It's easy to see the correlation here.

I'm going to trust the Bond market much more than what S&P has to say about American Debt. I'm not going to get into all of the theories that have been thrown around all weekend about why they did it and when they decided to do it. I'll leave it up to some of the funnier bloggers out there to get into detail - you know who they are.

For now, let's watch the bond market. It's interesting that US Treasury Bonds are now (by definition) riskier than they were last week, at least according to Standard and Poors. Riskier debt should have higher yields right? Well theory and practice are two different things. Higher bond yields should help stocks go higher, but that certainly is not the case this morning. Bond prices are up with lower yields (and stocks are down big). Throughout the day today and for the rest of the week we're going to be watching this negative correlation between stocks and bonds.

Remember that Bond traders are known as the smarter guys out there. Let's listen to how they are trading. If you see Bonds roll over, look for stocks to catch a bid. Remember that Treasury Bonds had a monster rally last week going into this S&P downgrade. There will be some nice trading opportunities in both directions this week. I'll be looking at what Bonds are doing to help with my entry points in the stock market. Good luck out there