The Ultimate Bear Chart

Authored by Sven Henrich via NorthmanTrader.com,

“There are two bubbles: We have a stock market bubble, and we have a bond market bubble” – Alan Greenspan January 31, 2018

This may not come as a surprise, but: I agree with him. Oh I know, every time Alan Greenspan says something related to “irrational exuberance” immediately the comments come that he said it in 1996 and stocks didn’t blow-up until 2000. While that may have been true then it didn’t invalidate his premise nor is the timing relevant to now. Back then people ignored him and went full bubble mode until it popped.

Indeed this one may still go on for a while and 2018 upside risk targets remain despite this week’s first pullback action of 2018. However this week’s corrective move coincided with a sustained technical breakout in the 10 year yield above its 30 year trend lines. Stock clearly reacted and not favorably.

Which brings me precisely to the relationship between stocks and bonds. If Alan Greenspan is correct then a chart I have been watching and musing about for a while may be the ultimate bear chart.

I’ve shown this chart before, but let me walk you through the theory of it.

This is a ratio chart of $TNX (10 year yield) vs the $SPX and yields a stunning picture:

The correlation is stunning to me from a technical perspective. Why? Because it is so incredibly precise.

Indeed, if Alan Greenspan is right, this chart could have enormous implications for the next few years. This chart could suggests a massive multi year bear market to emerge.

Let me explain why and how.

The ratio bottomed right near the 2008/2009 lows and, as you can see, we’ve seen a continued rise until the middle of 2016. In the years in between a trend line established itself that acted as precise support until the US election. That’s when everything went pear shaped.

Since then the trend line became resistance and the renewed effort to break above it rejected precisely at the trend line again in 2017. Given this history it seems hardly a coincidence, but rather suggests a technical relationship of importance.

Currently we see the ratio dropping hard this week. Why? Because stocks are falling and yields are rising. Which means that for this to move back higher yields must drop and stocks rise. Or at least yields need to stop rising.

But if yields continue to rise and stocks continue to fall the actual pattern of the ratio could be even more alarming:

That’s a massive multi-year heads and shoulders pattern. It’s not confirmed until it breaks its neckline, but consider the possibilities in context of the recent price action and in correlation to stocks and bonds on their own:

Basically what this implies is that the entire rally since the early 2016 lows will turn out to have been a blow-off top. Recall what I said at the outset: The high in ratio was made in mid 2016. The action since has placed 2 bear patterns: 1. The trend line break 2. The heads and shoulders pattern.

Now let me clear: I’m not calling for an immediate collapse here, but I’m, pointing to a possibly huge structural relationship between bonds and stocks, one that will likely take years to play out. But the signs of trouble are already in this chart. Bottom line: Bulls need yields to drop sooner rather than later or this market party may come to an abrupt end with deep reaching consequences.

There may hope in the short term as the ratio is about to reach critical support:

But if the ratio breaks below its neckline, then this chart may indeed prove to be the ultimate bear chart.

Comments

Yen Cross Fri, 02/02/2018 - 20:46 Permalink

 Moar chart porn?  I purposely "never" post charts, because they're "mis-leading".

  I do however, post factual figures, that traders can use to hypothesize, why and what direction their financial objectives might be.

bshirley1968 Fri, 02/02/2018 - 20:54 Permalink

Bear market? What a joke!

There is NO WAY a bear market can be sustained. Unless the "markets", equity and debt markets, are ever expanding, this zombie goes down.....fast and hard.

The stawk "market" is a must if this charade is going to keep going. No "bull" market and we come unraveled.

Golden Showers Fri, 02/02/2018 - 20:58 Permalink

A Kodiak will put you on your tummy. Then what it does is it puts it's HUGE jaws on the back of your skull and crushes that shit.

I like bears. If only humans had more natural predators life would be full of flava.

Fond of bears. However, when I look at Bulls, well, I think of that weak ass Madonna Video of some fag in Spain slaughtering an innocent herbivore in some blinged out pantalones and it turns. me. off.

Bears eat meat. Bulls get ritually murdered. Since Mithra.

Sizzurp Fri, 02/02/2018 - 21:45 Permalink

Does anyone here actually believe these are free markets, or these markets are not managed by central planners, people with the power to print trillions and support the debt market if need be?  

xdankx Fri, 02/02/2018 - 23:40 Permalink

You guys gotta check out the crypto chats online. Hilarious! Kids making charts, slapping an up arrow on it to indicate trends, bottoms called every $25 drops =D  They didn't know what time the US markets opened so they didn't know if they could go to sleep. Quite disturbing really but entertaining for sure.

nostops4me Sat, 02/03/2018 - 03:13 Permalink

The head and shoulders in the chart is a concern - but what stands out to me is the 2008/2009 financial crisis involved the S&P/TNX ratio dropping from 40 to 20 or so.  Now we're looking at the ratio having dropped from 155 to 98.  Does it go back to 20? Yikes!

martydz Sat, 02/03/2018 - 05:47 Permalink

I just finished reading the first report from Shepwave.com for Monday. There are some more surprises coming. So far they have been only analyst to actually predict markets.

Bond Wizzerd Sat, 02/03/2018 - 11:31 Permalink

This chart says that as rates head to zero, stocks head to infinity, which is absolutely true. When rates go negative in the next recession(and they will), this chart will be sporting a blue-veined bobber.

Let it Go Sat, 02/03/2018 - 11:34 Permalink

After years of central bank stimulus, many investors have become convinced of the idea that "central banks will never let markets go down." The so-called FANG stocks have accounted for much of the stock market rally we are witnessing, however, it might be wise to step back and question the fundamentals behind the upward movement of these stocks.

It is logical that these so-called bright spots that have pulled the market higher also have the most room to fall as valuations retreat. Signs that central banks are becoming more concerned about asset bubbles growing as a direct result of their actions is in the air. A massive surge in debt across the globe as consumers, businesses, and governments have thrown caution to the wind setting up a scenario that ends in tears. The article below explores why the FANG stocks may suffer most.

http://FANG Stocks Have Potential To Really Bite Investors.html

moneybots Sat, 02/03/2018 - 13:01 Permalink

"Back then people ignored him and went full bubble mode until it popped."

 

People didn't ignore Greenspan. When he said irrational exuberance the stock market dumped. Then people noticed he didin't back up his words with action. The stock market started running up again. The blow off occurred when Greenspan cut the rate from 5.5 to 4.75. The market did what Greenspan encouraged by his actions.