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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Zeev Hed who wrote (68419)	2/2/2001 11:15:51 PM
From: Andrew G.	Respond to of 99985

Zeev: Interestingly,stocks don't always rise with lowered rates: Message 15033779 Lower interest rates are supposed to be good for the market. As measured by the 10-year note yield, interest rates have been in a multi-year downtrend. Last year's advance in rates (fall in bonds) met resistance from the Oct-87 trendline and turned lower at the beginning of 1999. From the chart, it would seem that rates and the Nasdaq have a positive relationship. When rates rise, the Nasdaq rises. When rates fall, the Nasdaq falls, and believe it or not, this makes sense. Strong growth and inflation are bearish for bonds. When the bond market senses these, it usually falls (and rates rise). Weak growth and deflation are bullish for bonds, but not stocks. Rates advanced from below 4.5% in Oct-98 to above 6.5% in Jan-00, which indicated strong economic growth. This year (2000), rates declined from above 6.5% in Jan-00 to below 5.3% in Dec-00, which indicates weak economic growth, less inflationary pressure and possibly a hard landing or recession. Part of the reason for the Nasdaq advance in the face of rising interest rates was the yield curve. There are different ways to measure the curve and I prefer the 10yr note less the 2yr note. During the last part of 1998 and all of 1999, the yield curve was positive (eg the 10-year note yield was greater than the 2-year note yield). This changed in Feb-00 when the 10-year note yield dipped below the 2-year note yield, producing an inverted yield curve and signally tight money. Also revealing is the spread between Aaa corporate bonds and the 10-year note yield. As the yield curve inverted, the spread between these two debt instruments widened. This spread bottomed in early Feb-00 and shot up as the Nasdaq Marched on to new highs in Mar-00. The Nasdaq has since declined, but the spread continues to widen and surpassed its Oct-98 peak recently. Until the yield curve returns to normal and/or the spread between Aaa and the 10-year note yield declines below 1.7, the market is likely to remain in bear mode. stockcharts.com