My friend and mentor Wilfred R. George wrote an important book, Tight Money Timing (now out of print) on the effects of interest rates and fed policy on stock prices. With Bill and the thrust of his work in mind this episode of Power Charting is about the impacts of interest rate trends on the direction of stocks. Starting with a Point and Figure study on long term treasuries some estimates are made for how far bond prices can fall. Then a look at the tightening nature of the flattening yield curve, which is a tight money signal. Now the 10 year to 3 month treasury rates are on the verge of turning negative. A study of fed funds (the risk free yield) to the 2 year U.S. treasury yield during the prior three bear markets illustrates that this time is truly different.
Long term secular trends remain on the edge. The Dow Jones Industrials and the China stock markets are included in the studies. More ‘Green Shoots’ are evaluated. Gold and Silver futures are evaluated on a PnF basis and may have fulfilled downside counts. Will they begin to build Causes for their next moves? Stay tuned.
The Power Charting Trend Model is further discussed (see last weeks episode for more). The concept of trend breadth is introduced and there is only 9 industry groups currently in uptrends. A very oversold condition. Further discussion on this topic next time.
Chart Note: Chart 7 comparing the S&P 500 to Fed Funds and U.S. Treasury 2 year yields. The Fed Funds data is to September 1 (2.56%) and the U.S. Treasury Yields are to October 7 (4.30%). The current data on the Power Charting recording date is in an official range of 3-3.25%. The U.S. Treasury 2 Year Yield is now 4.62%. The current interest rate relationship remains similar to the chart shown. While interest rates are even higher now and the conclusions discussed in this episode remain unchanged.
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