BUYERS BEWARE

Not only is sentiment wildly bullish on stocks and equally as bearish on bonds, but history says that when yields and equity values soar in tandem, as they did in the summer of 2007, we almost always see a reversal in both markets.  Have a look at the Lex column (The Odd Decouple) in the weekend FT, which cites some nifty research to that effect. On average, equity prices corrected 12% in the next six months.  Some food for thought perhaps to the seers partaking in the Barron’s Outlook 2011 ― none of the 10 strategist see a down market, the average forecast is for a double-digit advance and the range is 1,250 to 1,450!

Quote from the weekend FT:

The Odd Decouple

Something’s gotta give. US Treasury yields have surged since September but equities have managed to rally amid the bond market carnage. The two are not mutually exclusive, but such symmetry is rare. Rising bond yields can coincide with the return of animal spirits after a nasty shock or the expectation of tighter monetary policy around the corner as the economy recovers. The reasons may be entirely different this time but the result – usually a selloff in stocks – may be similar.

Analysts at Bespoke Investment Group looked over the last four decades at instances when there was a simultaneous six-month peak in benchmark 10-year US Treasury yields and the S&P 500, as happened on Tuesday. The confluence was rare and, on average, negative for stocks over the following one-, three- and six-month periods. The very worst performance came in 1966 when ambitious federal social spending and the costs of a foreign war (sound familiar?) stoked inflation worries. The S&P 500 was 11.7 per cent lower six months later even as yields kept moving higher. In 1979, with stagflation taking hold, a similar result ensued – an 8.2 per cent drop in stocks and a hefty surge in yields.

…read more HERE (might require subscription)