STREET, NEW YORK, N.Y. 10005.)Rate of Change-CRB Futures Index andLong-Term Yields (12-Month Trailing)
24
COMMODITY PRICES AND BONDS
Although the focus of this chapter is on the relationship of commodities andbonds, it should be mentioned at this point that the 1980 peak in the commoditymarkets was accompanied by a major bottom in the U.S. dollar, a subject thatis explained in Chapter 5. The bottom in the bond market during 1981 and thesubsequent upside breakout in 1982 helped launch the major bull market in stocksthat began the same year. It's instructive to point out here that the action in the dollarplayed an important role in the reversals in commodity and bonds in 1980 and 1981and that the stock market was the eventual beneficiary of the events in those otherthree markets.The rising bond market and falling CRB Index reflected disinflation during theearly 1980s and provided a supportive environment for financial assets at the expenseof hard assets. That all began to change, however, in 1986. In another example of thelinkage between the CRB Index and bonds, both began to change direction in 1986.The commodity price level began to level off after a six-year decline. Interest ratesbottomed at the same time and the bond market peaked. I discussed in Chapter 2 thebeginning of the "head and shoulders" bottom that began to form in the CRB Indexduring 1986 and the warning that bullish pattern gave of the impending top in thebond market. Although the collapse in the bond market in early 1987, accompaniedby a sharp rally in the CRB Index, provided a dramatic example of their inverserelationship, there's no need to repeat that analysis here. Instead, attention will befocused on the events following the 1987 peak in bonds and the bottom in the CRBIndex to see if the intermarket linkage holds up.
BONDS AND THE CRB INDEX FROM THE 1987 TURNING POINTS
25
FIGURE 3.3A COMPARISON OF THE CRB INDEX AND TREASURY BOND YIELDS FROM 1986 TO 1989.INTEREST RATES AND COMMODITY PRICES USUALLY TREND IN THE SAME DIRECTION.Long-Term Interest Rates versus CRB Index
BONDS AND THE CRB INDEX FROM THE 1987 TURNING POINTSFigures 3.3 through 3.8 provide different views of the price action of bonds versusthe CRB Index since 1987. Figure 3.3 provides a four-year view of the interactionbetween bond yields and the CRB Index from the end of 1985 into the second halfof 1989. Although not a perfect match it can be seen that both lines generally roseand fell together. Figure 3.4 uses bond prices in place of yields for the same timespan. The three major points of interest on this four-year chart are the major peak inbonds and the bottom in the CRB Index in the spring of 1987, the major spike in theCRB Index in mid-1988 (caused by rising grain prices resulting from the midwesterndrought in the United States) during which time the bond market remained on thedefensive, and finally the rally in the bond market and the accompanying decline inthe CRB Index going into the second half of 1989. This chart shows that the inverserelationship between the CRB Index and bonds held up pretty well during that timeperiod.Figure 3.5 provides a closer view of the 1987 price trends and demonstrates- the inverse relationship between the CRB Index and bond prices during that year.The first half of 1987 saw strong commodity markets and a falling bond market.Going into October the bond market was falling sharply while commodity prices werefirming. The strong rebound in bond prices in late-October (reflecting a flight to safetyduring that month's stock market crash) witnessed a sharp pullback in commodities.Commodities then rallied during November while bonds weakened. In an unusualdevelopment both markets then rallied together into early 1988. That situation didn'tlast long, however.Figure 3.6 shows that early in January of 1988 bonds rallied sharply into Marchwhile the CRB Index sold off sharply, hi March, bonds peaked and continued to dropinto August. The March peak in bonds coincided with a major lowpoint in the CRB
Index which then rallied sharply into July. Whereas the first quarter of 1988 had seena firm bond market and falling commodity markets, the spring and early summer sawsurging commodity markets and a weak bond market. This surge in the CRB Indexwas caused mainly by strong grain and soybean markets, which rallied on a severedrought in the midwestern United States, culminating in a major peak in the CRBIndex in July. The bond market didn't hit bottom until August, over a month after theCRB Index had peaked out.Figure 3.7 shows the events from October 1988 to October 1989 and provides acloser look at the way bonds and commodities trended in opposite directions duringthose 12 months. The period from the fall of 1988 to May of 1989 was a periodof indecision in both markets. Both went through a period of consolidation withno clear trend direction. Figure 3.7 shows that even during this period of relativetrendlessness, peaks in one market tended to coincide with troughs in the other. Thefinal bottom in the bond market took place during March which coincides with animportant peak in the CRB Index.The most dramatic manifestation of the negative linkage between the two marketsduring 1989 was the breakdown in the CRB Index during May, which coincided with
26
COMMODITY PRICES AND BONDS
FIGURE 3.4THE INVERSE RELATIONSHIP BETWEEN THE CRB INDEX AND TREASURY BOND PRICES CANBE SEEN FROM 1986 TO 1989.Bond Prices versus CRB Index
BONDS AND THE CRB INDEX FROM THE 1987 TURNING POINTS
27
FIGURE 3.5EVEN DURING THE HECTIC TRADING OF 1987, THE TENDENCY FOR COMMODITY PRICESAND TREASURY BOND PRICES TO TREND IN THE OPPOSITE DIRECTION CAN BE SEEN.CRB Index versus Bond Prices1987
28
COMMODITY PRICES AND BONDS
FIGURE 3.6BOND PRICES AND COMMODITIES TRENDED IN OPPOSITE DIRECTIONS DURING 1988. THEBOND PEAK DURING THE FIRST QUARTER COINCIDED WITH A SURGE IN COMMODITIES.THE COMMODITY PEAK IN JULY PRECEDED A BOTTOM IN BONDS A MONTH LATER.CRB Index versus Bonds1988
BONDS AND THE CRB INDEX FROM THE 1987 TURNING POINTS
29
FIGURE 3.7THE INVERSE RELATIONSHIP BETWEEN THE CRB INDEX AND BOND PRICES CAN BE SEENFROM THE THIRD QUARTER Of 1988 THROUGH THE THIRD QUARTER OF 1989. THECORRESPONDING PEAKS AND TROUGHS ARE MARKED BY VERTICAL LINES. THE BREAKDOWNIN COMMODITIES DURING MAY OF 1989 COINCIDED WITH A MAJOR BULLISH BREAKOUT INBONDS. IN AUGUST OF 1989, A BOTTOM IN THE CRB INDEX COINCIDED WITH A PEAK INBONDS.CRB Index versus Bonds1989
30
COMMODITY PRICES AND BONDS
FIGURE 3.8THE POSITIVE LINK BETWEEN THE CRB INDEX AND BOND YIELDS CAN BE SEEN FROM THETHIRD QUARTER OF 1988 TO THE THIRD QUARTER Of 1989. BOTH MEASURES DROPPEDSHARPLY DURING MAY OF 1989 AND BOTTOMED TOGETHER IN AUGUST.CRB Index versus Bonds1989
HOW THE TECHNICIAN CAN USE THIS INFORMATION
31
FIGURE 3.9A MONTHLY CHART OF THE CRB INDEX FROM 1975 THROUGH AUGUST, 1989. THEINDICATOR ALONG THE BOTTOM IS A 14 BAR SLOW STOCHASTIC OSCILLATOR. MAJORTURNING POINTS CAN BE SEEN IN 1980,1982,1984,1986, AND 1988. MAJOR TREND SIGNALSIN THE CRB INDEX SHOULD BE CONFIRMED BY OPPOSITE SIGNALS IN THE BOND MARKET.(SOURCE: COMMODITY TREND SERVICE, P. O. BOX 32309, PALM BEACH GARDENS, FLORIDA33420.)CRB Index-Monthly
an upside breakout in bonds during that same month. Notice that to the far right ofthe chart in Figure 3.7 a rally beginning in the CRB Index during the first week inAugust 1989 coincided exactly with a pullback in the bond market.Figure 3.8 turns the picture around and compares the CRB Index to bond yieldsduring that same 12-month period from late 1988 to late 1989. Notice how closelythe CRB Index and Treasury bond yields tracked each other during that period oftime. The breakdown in the CRB Index in May correctly signaled a new downleg ininterest rates.HOW THE TECHNICIAN CAN USE THIS INFORMATIONSo far, the inverse relationship between bonds and the CRB Index has been demonstrated. Now some practical ways that a technical analyst can use this inverse relationship to some advantage will be shown. Figures 3.9 and 3.10 are monthly chartsof the CRB Index and nearby Treasury bond futures. The indicator along the bottom
of both charts is a 14-month stochastics oscillator. For those not familiar with thisindicator, when the dotted line crosses below the solid line and the lines are above75, a sell signal is given. When the dotted line crosses over the solid line and bothlines are below 25, a buy signal is given.Notice that buy signals in one market are generally accompanied (or followed)by a sell signal in the other. Therefore, the concept of confirmation is carried astep further. A buy signal in the CRB Index should be confirmed by a sell signalin bonds. Conversely, a buy signal in bonds should be confirmed by a sell signalin the CRB Index. We're now using signals in a related market as a confirming indicator of signals in another market. Sometimes a signal in one market will act asa leading indicator for the other. When two markets that usually trend in opposite
32
COMMODITY PRICES AND BONDS
FIGURE 3.10MONTHLY CHART OF TREASURY BOND FUTURES FROM 1978 THROUGH AUGUST, 1989. THEINDICATOR ALONG THE BOTTOM IS A 14 BAR SLOW STOCHASTIC OSCILLATOR. MAJORTURNING POINTS CAN BE SEEN IN 1981,1983,1984,1986, AND 1987. BUY AND SELL SIGNALSON THE TREASURY BOND CHART SHOULD BE CONFIRMED BY OPPOSITE SIGNALS IN THECRB INDEX. (SOURCE: COMMODITY TREND SERVICE, P.O. BOX 32309, PALM BEACH GARDENS,FLORIDA 33420.)T-Bonds Monthly Nearest Futures Contract
HOW THE TECHNICIAN CAN USE THIS INFORMATION
33
The next major turn in the CRB Index took place in late 1982, when a major downtrendline was broken, and commodities turned higher. The bond market started todrop sharply within a couple of months. In June 1984 the CRB Index broke its uptrendline and gave a stochastics sell signal. A month later the bond market began amajor advance supported by a stochastics buy signal.Moving ahead to 1986, a stochastics sell signal in bonds was followed by a buysignal in the CRB Index. This buy signal in the CRB Index lasted until mid-1988, whencommodity prices peaked. A CRB sell signal was followed by a trendline breakdownin the spring of 1989. Bonds had given an original buy signal in late 1987 and gavea repeat buy signal in early 1989. The late 1987 buy signal in bonds preceded themid-1988 CRB sell signal. However, it wasn't until mid-1988, when the CRB Indexgave its stochastics sell signal, that bonds actually began a serious rally.Figure 3.11 shows that the May 1989 breakdown in the CRB Index coincidedexactly with a bullish breakout in bonds. That bearish "descending triangle" in theCRB Index provided a hint that commodity prices were headed lower and bondshigher. Going into late 1989 the bond market had reached a major resistance areaFIGURE 3.11THE "DESCENDING TRIANGLE" IN THE CRB INDEX FORMED DURING THE FIRST HALF OF1989 GAVE ADVANCE WARNING OF FALLING COMMODITIES AND RISING BOND PRICES.THE BEARISH BREAKDOWN IN COMMODITIES IN MAY OF THAT YEAR COINCIDED WITH ABULLISH BREAKOUT IN BONDS. AS THE FOURTH QUARTER OF 1989 BEGAN, COMMODITIESWERE RALLYING AND BONDS WERE WEAKENING.'Treasury Bonds
directions give simultaneous buy signals or simultaneous sell signals, the traderknows something is wrong and should be cautious of the signals.The analysis of the stochastics signals will be supplemented with simpletrendline and breakout analysis. Notice that at the 1980 top in Figure 3.9, the monthlystochastics oscillator gave a major sell signal for commodity prices. The sell signalwas preceded by a major negative divergence in the stochastics oscillator which thenturned down in late 1980. The actual breaking of the major uptrend line in the CRBIndex didn't occur until June of 1981. From November of 1980 until September of1981, bond and commodities dropped together. However, the CRB collapse warnedthat that situation wouldn't last for long. Bonds actually bottomed in Septemberof 1981 when the stochastics oscillator also started to turn up and the inverserelationship reestablished itself.
34
COMMODITY PRICES AND BONDS
FIGURE 3.12A COMPARISON OF WEEKLY CHARTS OF TREASURY BONDS AND THE CRB INDEX FROM1986 TO OCTOBER OF 1989. IN EARLY 1987 RISING COMMODITIES WERE BEARISH FORBONDS. IN MID-1988 A COMMODITY PEAK PROVED TO BE BULLISH FOR BONDS. ENTERINGTHE FOURTH QUARTER OF 1989, RISING BONDS WERE BACKING OFF FROM MAJORRESISTANCE NEAR 100 WHILE THE FALLING CRB INDEX WAS BOUNCING OFF SUPPORT NEAR220.Treasury Bonds200 Weeks
THE ROLE OF SHORT-TERM RATES
35
message itself is relatively simple. If it can be shown that two markets generally trendin opposite directions, such as the CRB Index and Treasury bonds, that informationis extremely valuable to participants in both markets. It isn't my intention to claimthat one market always leads the other, but simply to show that knowing whatis happening in the commodity sector provides valuable information for the bondmarket. Conversely, knowing which way the bond market is most likely to trend tellsthe commodity trader a lot about which way the commodity markets are likely totrend. This type of combined analysis can be performed on monthly, weekly, daily,. and even intraday charts.THE USE OF RELATIVE-STRENGTH ANALYSIS
There is another technical tool which is especially helpful in comparing bond pricesto commodity prices: relative strength, or ratio, analysis. Ratio analysis, where onemarket is divided by the other, enables us to compare the relative strength betweentwo markets and provides another useful visual method for comparing bonds andthe CRB Index. Ratio analysis will be briefly introduced in this section but will becovered more extensively in Chapters 11 and 12.Figure 3.13 is divided into two parts. The upper portion is an overlay chart ofthe CRB Index and bonds for the three-year period from late 1986 to late 1989. Thebottom chart is a ratio of the CRB Index divided by the bond market. When the line isrising, such as during the periods from March to October of 1987 and from March toJuly of 1988, commodity prices are outperforming bonds, and inflation pressures areintensifying. In this environment financial markets like bonds and stocks are generallyunder pressure. A major peak in the ratio line in the summer of 1988 marked the topof a two-year rise in the ratio and signaled the peak in inflation pressures. Financialmarkets strengthened from that point. (Popular inflation gauges such as the ConsumerPrice Index—CPI—and the Producer Price Index—PPI— didnt peak until early 1989,almost half a year later.)In mid-1989 the ratio line broke down again from a major sideways pattern andsignaled another significant shift in the commodity-bond relationship. The fallingratio line signaled that inflation pressures were waning even more, which was bearishfor commodities, and that the pendulum was swinging toward the financial markets.Both bonds and stocks rallied strongly from that point.THE ROLE OF SHORT-TERM RATES
near 100. At the same time the CRB Index had reached a major support level near 220.Those two events, occurring at the same time, suggested at the time that bonds wereoverbought and due for some weakness while the commodity markets were oversoldand due for a bounce.To the far right of Figure 3.11, the simultaneous pullback in bonds and the bouncein the CRB Index can be seen. Figure 3.12, a weekly chart of bonds and the CRB Indexfrom 1986 to 1989, shows bonds testing overhead resistance near 100 in the summerof 1989 at the same time that the CRB Index is testing support near 220.LINKING TECHNICAL ANALYSIS OF COMMODITIES AND BONDSThe purpose of the preceding exercise was simply to demonstrate the practicalapplication of intermarket analysis. Those readers who are more experienced intechnical analysis will no doubt see many more applications that are possible. The
All interest rates move in the same direction. It would seem, then, that the positiverelationship between the CRB Index and long-term bond yields should also applyto shorter-term rates, such as 90-day Treasury bill and Eurodollar rates. Short-terminterest rates are more volatile than long-term rates and are more responsive to changesin monetary policy. Attempts by the Federal Reserve Board to fine-tune monetarypolicy, by increasing or decreasing liquidity in the banking system, are reflected morein short-term rates, such as the overnight Federal funds rate or the 90-day Treasury Billrate, than in 10-year Treasury note and 30-year bond rates which are more influencedby longer range inflationary expectations. It should come as no surprise then that theCRB Index correlates better with Treasury notes and bonds, with longer maturities,than with Treasury bills, which have much shorter maturities.Even with this caveat, it's a good idea to keep an eye on what Treasury bill andEurodollar futures prices are doing. Although movements in these short-term ratemarkets are much more volatile than those of bonds, turning points in T-bill and
36
COMMODITY PRICES AND BONDS
FIGURE 3.13THE BOTTOM CHART IS A RATIO OF THE CRB INDEX DIVIDED BY TREASURY BOND PRICESFROM 1987 THROUGH OCTOBER 1989. A RISING RATIO SHOWS THAT COMMODITIES AREOUTPERFORMING BONDS AND IS INFLATIONARY. A. FALLING RATIO FAVORS BONDS OVERCOMMODITIES AND IS NONINFLATIONARY.Bonds versus CRB Index
THE IMPORTANCE OF T-BILL ACTION
37
FIGURE 3.14THE UPPER CHART COMPARES PRICES OF TREASURY BILLS AND TREASURY BONDS. THEBOTTOM CHART COMPARES THE CRB INDEX TO PRICES IN THE UPPER CHART. MAJORTURNING POINTS IN TREASURY BILLS CAN BE HELPFUL IN PINPOINTING TURNS IN BONDSAND THE CRB INDEX. DURING MARCH OF 1988, BILLS AND BONDS TURNED DOWNTOGETHER (WHILE COMMODITIES BOTTOMED). IN THE SPRING OF 1989, A MAJOR UPTURNIN T-BILLS MARKED A BOTTOM IN BONDS AND WARNED OF AN IMPENDING BREAKDOWNIN COMMODITIES.Treasury Bonds versus Treasury Bills1988/1989
Ratio of CRB Index Divided by Bond Prices
CRB Index
Eurodollar futures usually coincide with turning points in bonds and often pinpointimportant trend reversals in the latter. When tracking the movement in the Treasurybond market for a good entry point, very often the actual signal can be found in theshorter-term T-bill and Eurodollar markets.As a rule of thumb, all three markets should be trending in the same direction.It's not a good idea to buy bonds while T-bill and Eurodollar prices are falling. Waitfor the T-bill and Eurodollar markets to turn first in the same direction of bondsbefore initiating a new long position in the bond market. To carry the analysis a stepfurther, if turns in short-term rate futures provide useful clues to turns in bond prices,then short-term rate markets also provide clues to turns in commodity prices, whichusually go in the opposite direction.THE IMPORTANCE OF T-BILL ACTIONOne example of how T-bills, T-bonds, and the CRB Index are interrelated can be seenin Figure 3.14. This chart compares the prices of T-bill futures and T-bond futures inthe upper chart with the CRB Index in the lower chart from the end of 1987 to late
1989. It can be seen that bonds and bills trend in the same direction and turn at thesame time but that T-bill prices swing much more widely than bonds. To the upperleft of Figure 3.14, both turned down in March of 1988. This downturn in T-billsand T-bonds coincided with a major upturn in the CRB Index, which rose over 20percent in the next four months to its final peak in mid-1988.The bond market hit bottom in August of the same year but was unable to gainmuch ground. This sideways period in the bond market over the ensuing six monthscoincided with similar sideways activity in the CRB Index. Treasury bill prices continued to drop sharply into March of 1989. It wasn't until T-bill futures put in abottom in March of 1989 and broke a tight down trendline that the bond marketbegan to rally seriously. The upward break of a one-year down trendline by T-billfutures two months later in May of 1989 coincided exactly with a major bullish
38
COMMODITY PRICES AND BONDS
breakout in bond futures. At the same time the CRB was resolving its trading range onthe downside by dropping to the lowest level since the spring of the previous year.In this case, the bullish turnaround in the T-bill market in March of 1989 did twothings. It gave the green light to bond bulls to begin buying bonds more aggressively,and it set in motion the eventual bullish breakout in bonds and the bearish breakdownin the CRB Index."WATCH EVERYTHING"
The preceding discussion illustrates that important information in the bond marketcan be found by monitoring the trend action in the T-Bill market. It's another exampleof looking to a related market for directional clues. To carry this analysis another step,T-Bills and Eurodollars also trend in the same direction. Therefore, when monitoringthe short-term rate markets, it's advisable to track both T-Bill and Eurodollar marketsto ensure that both of them are confirming each other's actions. Treasury notes, whichcover maturities from 2 to 10 years and lie between the maturities of the 90-day T-billsand 30-year bonds on the interest rate yield curve, should also be followed closelyfor trend indications. In other words, watch everything. You never know where thenext clue will come from.The focus of the previous paragraphs was on the necessity of monitoring allof the interest rate markets from the shorter to the longer range maturities to findclues to interest rate direction. Then that analysis is put into the intermarket pictureto see how it fits with our commodity analysis. A bullish forecast in interest ratefutures should be accompanied by a bearish forecast on the commodity markets.Otherwise, something is out of line. This chapter has concentrated on the CRBIndex as a proxy for the commodity markets. However, the CRB Index represents abasket of 21 active commodity markets. Some of those markets are important in theirown right as inflation indicators and often play a dominant role in the intermarketpicture.' Gold and oil are two markets that are inflation-sensitive and that, at times, canplay a decisive role in the intermarket picture. Sometimes the bond market willrespond in the opposite direction to any strong trending action by either or both ofthose two markets. At other times, such as in the spring of 1988, during the worstdrought in half a century, the grain markets in Chicago can dominate. It's necessaryto monitor activity in each of the commodity markets as well as the CRB Index. Therespective roles of the individual commodities will be discussed in Chapter 7.SOME CORRELATION NUMBERS
This work so far has been based on visual comparisons. Statistical analysis appears toconfirm what the charts are showing, namely that there is a strong negative correlationbetween the CRB Index and bond prices. A study prepared by Powers Research, Inc.(Jersey City, NJ 07302), entitled The CRB Index White Paper: An Investigation intoNon-Traditional Trading Applications for CRB Index Futures (March, 1988), reportedthe results of correlation analysis over several time periods between the CRB Indexand the other financial sectors. The results showed that over the 10 years from 1978to 1987, the CRB Index had an 82 percent positive correlation with 10-year Treasuryyields with a lead time of four months.In the five years from 1982 to 1987, the correlation was an even more impressive+92 percent. Besides providing statistical evidence supporting the linkage between
SUMMARY
39
the CRB Index and bond yields, the study also suggests that, at least during the timespan under study, the CRB Index led turns in bond yields by an average of fourmonths.In a more recent work, the CRB Index Futures Reference Guide (New York FuturesExchange, 1989), correlation comparisons are presented between prices of the CRBIndex futures contract and bond futures prices. In this case, since the comparisonwas made with bond prices instead of bond yields, a negative correlation shouldhave been present. In the period from June 1988 to June 1989, a negative correlationof -91 percent existed between CRB Index futures and bond futures, showing thatthe negative linkage held up very well during those 12 months.The 1989 study provided another interesting statistic which takes us to our nextstep in the intermarket linkage and the subject of the next chapter—the relationshipbetween bonds and stocks. During that same 12-month period, from June 1988 to June1989, the statistical correlation between bond futures prices and futures prices of theNew York Stock Exchange Composite Index was +94 percent. During that 12-monthspan, bond prices showed a negative 91 percent correlation to commodities and apositive 94 percent correlation to stocks, which demonstrates the fulcrum effect ofthe bond market alluded to earlier in the chapter.The numbers also demonstrate why so much importance is placed on the inverserelationship between bonds and the commodity markets. If the commodity marketsare linked to bonds and bonds are linked to stocks, then the commodity marketsbecome indirectly linked to stocks through their influence on the bond market. Itfollows that if stock market traders want to analyze the bond market (and they should),it also becomes necessary to monitor the commodity markets.SUMMARY
This chapter presented graphic and statistical evidence that commodity prices,represented by the CRB Index, trend in the same direction as Treasury bond yields andin the opposite direction of bond prices. Technical analysis of bonds or commoditiesis incomplete without a corresponding technical analysis of the other. The relativestrength between bonds and the CRB Index, arrived at by ratio analysis, also providesuseful information as to which way inflation is trending and whether or not theinvestment climate favors financial or hard assets.
4
THE BOND MARKET BOTTOM OF 1981 AND THE STOCK BOTTOM OF 1982
41
was mainly responsible for the bearish top in the commodity sector. The rising dollarin the early 1980s provided a supportive influence for financial assets like bonds andstocks and was mainly responsible for the swing away from tangible assets.THE BOND MARKET BOTTOM OF 1981AND THE STOCK BOTTOM OF 1982
Bonds Versus Stocks
In the previous chapter, the inverse relationship between bonds and commodities wasstudied. In this chapter, another vital link will be added to the intermarket chain inorder to study the positive relationship between bonds and common stocks. The stockmarket is influenced by many factors. Two of the most important are the direction ofinflation and interest rates. As a general rule of thumb, rising interest rates are bearishfor stocks; falling interest rates are bullish. Put another way, a rising bond market isgenerally bullish for stocks. Conversely, a falling bond market is generally bearish forstocks. It can also be shown that bonds often act as a leading indicator of stocks. Thepurpose of this chapter is to demonstrate the strong positive linkage between bondsand stocks and to suggest that a technical analysis of stocks is incomplete without acorresponding analysis of the bond market.Treasury bond futures, which have become the most actively traded futures contract in the world, were launched at the Chicago Board of Trade in 1977. In keepingwith the primary focus on the futures markets, our attention in this chapter will beconcentrated on the period