A Warning Sign?

One of the general rules of the thumb on Wall Street is that the stock market tends to follow the long-term bond market. I should stress that this is a very general rule. I’ve never been a market timer, and I’m not going to start now. But I want to show you how the market often reacts.
Here’s a chart of the S&P 500 (black line) versus the American Century Target Maturities Trust—2025 Portfolio (the gold line, symbol: BTTRX) from May 1996 to December 1999. I’m using BTTRX as a proxy for long-term bonds (it’s a mutual fund that holds the Treasuries coming due in 2025).

Notice how closely the two lines followed each other, right until 1999. That’s when long-term bonds started to head down while equites continued to float upward. It was a foreshadowing of what was to come.
Now here are the same two since the summer of 2003.

It’s not exactly the same, but you can see some similarities. The BTTRX is parting ways with stocks.
Here’s the chart one more time, since last August:

Now you can really see it. The two were like waltzing partners right up to the beginning of March. Like I said, I’m not predicting a fall in equities, but the bond market could be.

Posted by Eddy Elfenbein on May 16th, 2006 at 12:16 pm

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