The stock market is influenced by many factors. Two of the most important are the direction of inflation and interest rates. The reason commodity prices are so important is because of their role as a leading indicator of inflation. As a general rule of thumb, rising interest rates are bearish for stocks; falling interest rates are bullish. Put another way, a rising bond market is generally bullish for stocks. Conversely, a falling bond market is generally bearish for stocks. It can also be shown that bonds often act as a leading indicator of stocks. One is to demonstrate a strong positive relationship between bonds and stocks. In other words, the price action and technical readings in the two markets should confirm each other. As long as they are moving in the same direction, analysts can say that the two markets are confirming each other and their trends are likely to continue. It’s when the two markets begin to trend in opposite directions that analysts should begin to worry. The second point is that the bond market usually turns first. Near market tops, the bond market will usually turn down first. At market bottoms, the bond market will usually turn up first. Therefore, the technical action of the bond market becomes a leading technical indicator for the stock market.

Since bonds and stocks are historically linked together, technical analysis of one without a corresponding analysis of the other is incomplete. At the very least a stock market trader or investor should be monitoring the bond market for confirmation. A bullish technical forecast for bonds is also a bullish technical forecast for stocks.

Although a falling bond market is almost always bearish for equities, a rising bond market does not ensure a strong equity market. Deteriorating corporate earnings during an economic slowdown may overshadow the positive effect of a rising bond market (and falling interest rates). While a rising bond market doesn’t guarantee a bull market in stocks, a bull market in stocks is unlikely without a rising bond market.

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