Bond risk levels as a stock market indicator

Key points

• There is inarguably a relationship between stocks and bonds
• The 50-day average of our Bond Risk Levels indicator recently crossed above a level that has typically been followed by stock market strength
• The latest signal got off to a terrible start - but is looking better now

First a reminder about indicators

Some rules I follow regarding market indicators are as follows:

• Not every "squiggle" from every indicator "means something"
• Not every signal from every indicator is meant to serve as an automatic buy or sell signal in and of itself
• Most individual indicators are best used not as a standalone trading strategy or system but as weight of the evidence

With those rules in mind, let's take a closer look at a recent signal from our Bond Risk Levels indicator applied to the stock market.

Bond Risk Levels versus stocks

The chart below displays our Bond Risk Levels indicator and the S&P 500 Index.

The chart below displays the 50-day moving average for the Bond Risk Levels indicator and the S&P 500 Index.

The chart below highlights with a red dot those times when the 50-day moving average for Bond-Risk Levels crossed above 2.4 while the S&P 500 was above its 200-day moving average. The most recent signal occurred on 2025-01-08.

The table below displays signal-by-signal performance for the S&P 500 following previous signals.

The table below summarizes the S&P 500 following previous signals.

The timing of the most recent signal appeared unfortunate for a couple of days, given the sell-off on January 10 and the sharply lower open on January 13. The market has since rebounded.

What the research tells us…

There is good news and bad news regarding the results above. The good news is that the historical results are compelling and would appear to lend weight to the bullish side of the weight of the evidence ledger. The bad news is that there are only seven prior signals (i.e., a small sample size), so there is a danger in drawing conclusions. There is no implication that the stock market will rise in the next year solely because of the signal in early January 2025, and no investor should make that assumption. Still, the information above lends weight tot he favorable side of the weight of the evidence ledger.