Friday, May 31, 2013

Bonds, S&P 500 Flashback

I was recently reading some articles that seemed to tap into some of the fear that is underlying stock prices. I don't know if stocks are overvalued, undervalued, or fairly priced, but it all doesn't really matter. What is important is try to feel out and look at the balance between the HOPE that prices will go higher, and the FEAR that they have had a nice run and need to consolidate or correct.

In a test tube when the S&P 500 was at 666 it would make sense that it was there because of fearful required liquidation selling and that prices would not go to zero. That isn't want happens, it is the place when fear is the greatest and it feels like things might go to zero even though they never will. Also in a perfect test tube environment people that bought at the low area would have HOPE that prices would go higher, but as the market starts to recover instead of hope, FEAR comes in that prices might return and go lower.

Now after a strong recovering in the market, HOPE is all over and fear is gone. "Buy the pull backs" and other such systems are in vogue as long as the trend holds, but what happens when the HOPE/FEAR balances starts to change. Will it be an orderly sell off or will it it be a flash crash that recovers 30 minutes after it happens? Will a correction even happen?

Below are a couple charts from 1987 that show the S&P 500 and bond yields leading up to and during that crash.

S&P 500 Weekly Chart

S&P500 2013

The horizontal lines are extensions off of the opening range of the beginning of the year. I use them as areas to trade off of, but use at your own discretion.

10 Year Treasury Futures.

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