Use market correlations to better your odds in trading
What You Must Know About Inter-Market Relationships (Part 2 of 2)
Last month, we initiated the discussion of inter-market relationships focusing on the currency market’s influence over commodity prices (if you missed it, you will find it here. Let’s turn our attention to the relationships that exist between various asset classes; some of the conclusions from data will likely go against conventional wisdom.
Stocks and bonds can go up and down together
The oldest adage in the finance industry is, “Stocks up, bonds down”. The quip stems from conventional theory suggesting there are two primary investment vehicles available to the main-stream investor, stocks and bonds. In essence, these two asset classes are assumed to be fighting for the same limited amount of investment dollars. Accordingly, if one is in favor, the other is out of favor, and vice versa. Thus, many assume that if the stock market is going up, investors are selling their Treasury holdings to purchase stocks. Therefore, Treasury bonds should head lower when stocks are moving higher.
The aforementioned theory hasn’t necessarily been in play in recent years. There are several explanations that attempt to describe the disconnect from history, but here are the two that stick out in our minds: