Bond market flashes warning signal to stocks and only one of these asset classes can be right.
As everyone knows, the bond market and the stock market tend to move inversely to each other. As stocks rise, bond prices fall and bond yields rise. As stock market prices fall, bond market prices rise and bond market yields falls.
This is simply a reflection of the flow of capital between “risk on” and “risk off” assets and tends to be reliable over long time frames.
However, in today’s central bank influenced Wizard of Oz economy, interesting divergences are now taking place between the bond market and the stock market.
Chart courtesy of StockCharts.com
In the chart above, it’s easy to see how 10-year bond yields (NYSEARCA:IEF) and the S&P 500 (NYSEARCA:SPY) tend to move in harmony. As the S&P 500 rises in price, bond yields tend to rise, and as the S&P 500 falls in price, bond yields tend to fall and bond prices rise. This is the natural flow of supply and demand in U.S. financial markets.