How Stocks Do Depends On Bonds & Yen!

JC Parets
October 2, 2018

I have to give credit to our Intermarket Analysis work for a lot of our success over the years. This "Cross-Asset" perspective is incredibly valuable, particularly when it comes to identifying and staying with important trends. As a supplement to our Technical work in U.S. Stocks and Indexes, we incorporate a variety of Intermarket relationships to help us formulate a thesis. These include Bonds, Commodities and Currencies.

When it comes to safety, I don't care what people believe is a safe haven, I only care how the market reacts when it needs to go safe. When markets stressed and volatility rises, stocks fall in price and US Treasury Bonds and Japanese Yen reap the benefits.  When did Yen and Bonds get strong? Summer of 2015 just as the S&P500 was topping out. When did Yen and Bonds peak? When stocks got going several months before the 2016 elections. Both of these are near their 52-week lows, which makes perfect sense with Stocks at all-time highs.

So, the way I see it, we're most likely going to see Yen and Bond strength if stocks really sell off this quarter. The other side of that argument is that stocks are likely to do well in an environment where these "safe haven" assets are selling off. Here is a chart of both U.S. Treasury Bonds and Japanese Yen close to major breakdowns. If this is indeed the case, and both of these assets do break, I would bet that stocks are ripping in that environment:

Let's of course play devil's advocate here, as we always do. What's the other side of the argument? I would say that Yen and Bonds are near important lows, rather than about to begin a new leg lower. The other argument is that the correlations change. While I'm comfortable erring on the side of correlations staying consistent here, it's be lack of a breakdown that would present a problem for equities in my opinion. Let's just say that if these two assets don't break down, and instead squeeze higher. I would bet stocks get crushed in that scenario.

So I'm open to all possibilities. I continue to be in the camp that stocks go higher and these two break down accordingly. That would be a friendly environment to stockholders. But we'll be watching and reacting to either outcome.

Let me know what you think!

- JC

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