These Indicators Suggest Stock Markets Have More Upside

A variety of technical analyses all clearly indicate that the S&P 500′s run is by no means over. Here are some charts and an analysis of what they mean for the markets, the U.S. dollar and gold.

Breakdown of Treasury Yield Ratio Suggests Changes Coming to Markets

The treasury yield ratio is the ratio of a long-term treasury yield to a short-term treasury yield. Although the yield ratio is not plotted exactly the same as the traditional yield curve, it has a similar importance in that it gauges changes in rates and maturities of treasury securities that will impact on financial markets. The yield ratio goes up as the spread between a long-term and a short-term rate widens, and vice versa.

The daily yield ratio of the 10-Year U.S. Treasury Yield ($UST10Y) to the 2-Year U.S. Treasury Yield ($UST2Y), as shown in the chart below, peaked last November 3rd at 7.85 - its highest level in 20 years – with the Fed’s QE2 announcement that it intended to buy $600 billion worth of long-term treasury securities in an attempt to drive down long-term interest rates. The yield ratio decisively reversed immediately thereafter forming a 7-month roof pattern that is a typical topping formation.

Just last week, on February 8, the yield ratio penetrated through the horizontal line of the roof pattern and confirmed the reversal of the yield ratio. As the Fed keeps adding pressure to long-term interest rates by QE2, the yield ratio should be expected to continue the downtrend that will bring significant changes to a broad range of financial markets worldwide.

Decline in Treasury Yield Ratio Suggests Continuing U.S. Stock Bull-Market

During the last 20 years, there have been three occasions where a major downward slopping of the treasury yield ratio occurred. The chart below shows a comparison between the yield ratio which is plotted with a black line and the S&P 500 index which is plotted in the grey area. The first occasion was in 1992-1994 when the ratio went down from 1.67 to nearly 1.0, corresponding to a 15% advance in the S&P 500 index. The second time occurred in 1995-2000 when the yield ratio declined from 1.17 to 0.92, corresponding to a 200% advance of the S&P 500 index, and the third time happened in 2003-2007, when the yield ratio dropped from 2.8 to below 1.0, corresponding to a 73% advance in the S&P 500 index. (more)