Thursday, March 02, 2006

Rising Gold, Rising Rates: Evidence of Changing Cycles?

The past two days we've seen interest rates on the 10-year Note rise by about 2% and gold stocks ($XAU) rise by over 4%. So I decided to take a look at what happens after two-day periods in which both rates ($TNX) and gold stocks rise by 2% or more.

Since March, 2003 (N = 749), we've had 32 days that meet the 2% criteria. Interestingly, four days later we see an average change in SPY of .70% (23 up, 9 down). That's quite a bit more bullish than the average four-day change for the sample of .25% (433 up, 316 down). We have to count that one for the bulls going forward.

One would think that an inflationary environment (rising gold, rising interest rates) might weigh on stocks. At least in the near term since 2003, that hasn't been the case. If we started seeing that pattern emerge, it would represent a key market shift. We've had 10 instances of 2% rises in rates and gold since 2005 and 6 have resulted in positive change in SPY four days later (average change = .22%). Thus the bullish pattern really isn't manifesting itself recently. This is worth keeping an eye on, as we might be seeing market sentiment re: inflation changing before our eyes.


David H said...

The time period of your study was a period where deflation was the biggest fear in the market, thus any signs of inflation would be greated positivly.

Brett Steenbarger, Ph.D. said...

Yes, I think you're right; see my Trading Markets article that should come out later this (Friday) AM. The question then becomes whether we can use the market's responses to interest rate movements to track shifts in the mindsets of participants: from fear of deflation to excitement re: growth to fear of inflation. My conjecture is that we're seeing such a shift during 2005/6. This is why I weight recent data most highly in historical analyses for my own trading. Thanks for the observation--