What happens when 1-3 year Treasury Bonds and the S&P 500 are both stretched above and below their 20 day moving averages?
It is hard to miss the persistent news pieces about Treasury bonds rising, and even harder to miss the news about the S&P 500 falling. Is there a relationship between Treasury bonds and the S&P 500, and if so, what does it portend for the future? Let’s develop a simple model of the relationship…
Treasury bonds, as measured by SHY ( iShares Barclays 1-3 Years Treasury Bond ETF), is extended above its 20 day moving average. As of Friday’s close it was 0.16% above the MA20.
SPY is stretched beneath its 20 day moving average. As of Friday’s close it was -8.43% beneath the MA20.
The Rules:
Buy SPY at the Close If:
- SPY is stretched more than -5% beneath its 20 day moving average
- SHY is stretched more than 0.10% above its 20 day moving average
No commissions or slippage included. All SPY and SHY history used.
The Results:
I isolated SPY performance after it was more than -5% beneath its MA20. I also isolated SPY performance after SHY was more than 0.10% above its MA20. Separately, each event is neutral to bullish over the intermediate term. However, when combined, they are bearish.
Sample size is a possible issue. These events tend to cluster so that the longer each trade is held, fewer samples are available. Let me know if that concept is confusing. There were 47 occurrences of the setup if each trade was held only 1 day, but only 7 if each trade was held for the full 100 days.
Still, since there were plenty of samples of the isolated variables, I’m inclined to consider that we might be in the early days of another protracted bear market. If you pay attention to nothing else, pay attention to the volatility shown by the setup results (blue line). I’ve been highlighting for weeks now that we have to be prepared for large, volatile swings, in either direction. This study does nothing but confirm that volatility will be a key feature, going forward.
I like how on the 100th day there’s a big plunge in the blue line
It looks like that is due to November, 2008.
I figured it’s probably due to one or two big moves skewing the data, but it looks more ominous this way nevertheless.
We just felt an earthquake in NYC that was apparently centered in your neck of the woods. Hope everything is ok!
Hey B! Thanks for checking. We are fine. We all really felt it. It was pretty exciting. Good to hear from you.