Whew. It took me awhile to wade through all the political posts. I think this thread is now 80% political drivel and 20% financial. Egads! Anyway, here's an article that gets us back on topic:
Major Bond-Equity Divergence Implies Stocks Are Mispriced By 60 Points; Goldman Warns Not To "Chase Equity Bounce"
Submitted by Tyler Durden on 07/09/2010 07:25 -0500
zerohedge.com
Just like the daily occurrences of dislocations in the carry trade and risk assets, another major divergence has developed in the market, this time between bonds and stocks. As the following chart from Goldman points out, over the past month, stocks and 10 year yields have diverged quite notably, with a convergence of the two series implying an up to 60 S&P point disconnect. As these types of convergences are by far the least risky trades available (or most risky, depending on the amount of leverage), a recoupling bias would suggest shorting the broader market and selling the 10 Year (betting on a yield increase). Either way, it is obvious that the credit market, which is inevitably always right compared to the computerized pandemonium of stocks, suggests a substantial overpricing in equities.
Here are Goldman's associated points:
* While as discussed on the prior slides there is scope for Wednesday’s bounce in equity markets to extend a bit further, the correlation chart shown opposite makes us feel uncomfortable chasing it, as with the bounce in early-June
* This chart shows U.S. 10-year yields in green overlaid with the S&P in blue.
* It highlights that the rolling correlation between U.S. 10-year yields and the S&P has picked up since late- April.
* Importantly from a trading perspective yields have tended to be the lead indicator for the broader trend over recent weeks.
* A divergence is currently developing between the two with equities rising further than yields would imply “they should”. The last something similar developed, in early-/mid-June, it was equities which turned out to be “wrong”, eventually again moving lower to recouple with the level implied by yields.
* In conclusion while it’s quite possible the current bounce can run further, we would be uncomfortable actively chasing it as in June. |
