Four sectors of the financial market

We have discussed the mutual relationship between the market and the bond market products, for which there is a business cycle. This connection can be traced through the impact of inflation and interest rates.

It will be reviewed by the mutual influence of stock and bond markets, as well as the foreign exchange market due to other sectors of the financial market. The construction of graphs used technical analysis package of CQG.

Part 2. The stock market and the bond market

The dynamics of the stock market is affected by many factors. Most important - the direction of movement of inflation and interest rates. Therefore the analysis of the stock market and investing in them would be incomplete if you do not analyze the relationship between stocks and bonds, and between stocks and inflationary pressure.

Rules and exceptions

The basis depending stock and bond markets is the business cycle. It is believed that the dynamics of bonds and stocks ahead of the development of the economy, but the bond market ahead of the development of the stock market. Generally, increases in interest rates causes a drop in the stock market and the decline in interest rates contributes to its growth. In other words, rising bond market (bond prices) has a bullish effect on the stock market. Conversely, lowering the bond market has a bearish impact on the stock market.

The figure shows the monthly charts of the index S & P 500 futures prices on 10-year U.S. government bonds since 1991 can be seen that prices began to rise from bullish breakout in February 1995, but this breakthrough was preceded by a bullish breakout in the bond market in January of that year. C increase in growing stock and bond prices, but since the second half of 1998, growth in the stock market was not confirmed by the growth of bonds. Stocks continued to rise in late 1999 and early 2000, and the bond market has fallen more than a year, which could not but cause concern about the possible fall and stocks. Beginning in 2000, the stock market and the bond market vary in opposite directions: one falls, the other grows, setting multi-year highs. While bullish breakout bonds in August 2002 contributed to the formation of the base in the stock market, in general, growth in the bond market is not able to support the falling since 2000 shares.

John Murphy from the assertion that the bond market has the advanced features that make one exception. He notes in his book "Intermarket Technical Analysis": "While falling bond market leads to a drop in shares rise in the bond market is no guarantee of lifting the stock market" [1]. In this case, however, the increase in the stock market is unlikely without the growth of the bond market. That is, bonds fall amid rising stocks (as in 2000) should become a serious warning for investing in stocks.

Negative Factors

Growth bonds amid falling stocks can take a long time. It is a situation that exists at present. J. Murphy explains this by the fact that during the recession the positive effect on the growth of the bonds (and lower interest rates), offset by the reduction in corporate income. In addition, in 2000-2002. additional negative impact on the economic recovery and the stock market of the United States had the following non-market factors [2]: