To visualize the discussion in the Intermarket Synopsis section, think of bonds as the elephants making the waves for stocks to surf. As savvy an Elliottician as you are or aspire to be, make sure the elephants are in the same pool making waves for your Elliot Wave counts to count! Otherwise, the pool party is somewhere else and you are left standing gazing at the low tide.
Bond Tickers a.k.a "Treasuries" (use for tracking purposes, not trading)
BIL AMEX SPDR Lehman 1-3 Month T-Bill
FVX CBOE Treasury 5 year Bond Yield
TNX CBOE Interest Rate 10 Year Bond Yield
TYX CBOE Interest Rate 30 Year Bond Yield
Optionable Bond Funds for trading purposes
IEF iShares Barclays 7–10 Year Treasury Bond Fund
TLT iShares Barclays 20+ Year Treasury Bond Fund
TIP iShares Barclays TIPS (Treasury Inflation Protected Securities) Bond Fund
Bond – More than a SPY
Within the Business Cycle, you need to know if Bonds are behaving normally, for Stocks to behave within normal ranges. Otherwise, your positions in equity-based Indexes/ETFs (for example the SPY); or, be it a single stock is more likely to behave differently from what you expect.
Most economists use the default yield curve that plots the yields of 3–Month, 2–Year, 5–Year and 30–Year U.S. Treasury rates, along their respective time horizons. To benchmark other debt in the market (mortgage or bank lending rates), this default yield curve is used. The curve is also used to predict changes in economic output and growth.
Normal/Positive Yield Curve. A normal curve occurs when the 30–Year rate is highest and the 3–Month rate is lowest. The normal curve’s shape can be understood in terms of risk: higher interest rates compensate investors for the greater risk they take of investing money in the increased uncertainty of successively longer time periods.
Flat Yield Curve. 0.1%–0.5% difference between the 3–Month, 2–Year, 5–Year and 30–Year rates. Occurs in transition between Normal and Inverted curves. A flat curve often reverses back into a normal curve or inverted curve.
Steep Yield Curve (Expansion). Historically, the 20–Year Bond has yielded on average about 2% points above that of the 3–Month T–Bill. When this gap widens increasingly (i.e. the 20–Year Bond rises relatively higher than the 3–Month T–Bill by 2+%), the curve becomes steeper and the economy is expected to accelerate. Typically, the curve gets steeper at the start of an economic expansion (or at the end of a recession). When the gap closes increasingly with the curve flattening up to a point where the 20–Year Bond crosses below the 3–Month T–Bill, the economy sends mixed signals and is likely to go into a basing pattern.
Inverted/Negative Yield Curve (Recession). A completely inverted yield curve occurs when the 3–Month rate is the highest and the 30–Year rate is the lowest. A humped or partially inverted curve has the 5–Year and/or 10–Year rate higher than the 30–Year rate. The term inverted yield curve applies to both cases. A flat yield curve must precede an inverted yield curve. As the normal yield curve flattens, the odds increases for an inverted yield curve to occur, warning of a recession.
Stocks are more likely to behave within reason, when the Yield Curve is Normal and becoming increasingly Steep. During a Flat Curve and when Inversion occurs, it’s prudent to limit exposure to stocks or equity–based Indexes/ETFs and divert trading capital into the other Asset Classes (Bonds, Commodities & Currencies).
To forecast GDP 1 year ahead, economists often use the spread between 10 Year Note and 3 Month T–Bill. Given the GDP forecast is for 12 moths, this is a valid proxy measure for the stock market.
GDP 1 Year forecast = (10 Year Note MINUS 3 Month T–Bill) = +/– “GDP Spread”.
❑ If the GDP Spread is Positive and the default Yield Curve is Normal, GDP forecast is for the economy to expand next 1 year; or, continue expansion within the next 6 months.
– More bullish trades than bearish in select sectors (pending specifics on volatility) may make sense.
❑ If the GDP Spread is Negative and the default Yield Curve is Inverted, GDP forecast is for a likely recession the next 1 year; or, growth is to slow down within the next 6 months.
– More bearish trades than bullish in select sectors (pending specifics on volatility) may make sense.
Historically, the probability of a recession when the GDP Spread reached +1 was 5%; and, when the GDP Spread turned negative to a point of –2.0, the probability of a recession was 90%.