Monday, March 06, 2006

Interest Rate Rises: What They Mean for Stocks--and Bonds

On 3/2/06, I wrote about the possibility of changing cycles vis a vis interest rates and stocks based on recent shifts in historical patterns. Today we saw more evidence of this, as stocks moved to multi-day lows and rates moved to multi-day highs. Specifically, we are down about 1% over the last five days in SPY and up about 3.22% in the 10-year Note interest rate ($TNX). I decided to take a longer look and went back to April 2000 (N = 1480) to see what happens when we get a rise in rates of over 2.5% in a five day period.

I found 251 such occasions. Ten days later, interest rates had risen further by an average of .61% (135 up, 116 down) and stocks had fallen further, by an average of -.11% (121 up, 130 down). Rates were stronger than the average change for the sample overall (-.07%; 639 up, 841 down). Stocks were weaker than the average change for the sample (-.03%; 762 up, 718 down).

I then looked at the results from 2003 to the present (N = 155). Ten days after the five-day rise in rates, stocks were down by an average of -.19% (74 up, 81 down) and rates were up by 1.10% (87 up, 68 down).

In short, a strong weekly rise in interest rates has been associated with further bond weakness (rate rises) and further stock weakness. We'll have to count this as one for the bears going forward.

2 comments:

Paulo de León said...

Excelent trading markets´article. You capture the mood of the moment that many of us are into.
Tx.....

Brett Steenbarger, Ph.D. said...

Thanks for your comment. For those interested, the Trading Markets article is at http://www.tradingmarkets.com/.site/Daytrading/Commentary/wmgame/03062006-49866.cfm

My sense, FWIW, is that a very high proportion of intraday traders of the stock index futures are struggling. It certainly has me rethinking my trading strategies and the issue of where I am likely to find the greatest opportunity.

Brett