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INTEREST RATES MATTER AT THE MARGIN

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Last week the 10-year note and 30-year bond rose decidedly above the psychologically important 5.0% level. This is first time since June-2002 that the 10-year has traded above this level. If we have learned anything in our 24 years of trading – it is that interest rates matter at the margin. Moreover, the technical prospects are very good for the 10-year to rise to 5.3% and the 30-year to 5.5%. Soon, we should begin to see a slowing of the economy and a equity market correction of at least -10%.

Thus, we like to look at the Lehman 20+ year bond fund/S&P 500 "Spyders" Ratio (TLT: SPY) to glean important information. At the present time, the ratio is oversold and due for a technical bounce in the least; however, in 3 of the past 4 bounces...stocks have corrected rather sharply, but not by -10% of more. But the higher rates go...the greater the risk – especially given the underlying internal deterioration seen during last week's decline.

Therefore, we are selling stocks short – and moving to a slightly overweight short position in the Paid-to-Play "Long/Short" Portfolio.

 

 


Chip Anderson
About the author: is the founder and president of StockCharts.com. He founded the company after working as a Windows developer and corporate consultant at Microsoft from 1987 to 1997. Since 1999, Chip has guided the growth and development of StockCharts.com into a trusted financial enterprise and highly-valued resource in the industry. In this blog, Chip shares his tips and tricks on how to maximize the tools and resources available at StockCharts.com, and provides updates about new features or additions to the site. Learn More
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