Political  Calculations

We didn't set out to solve a mystery, but once again, it appears that we have.

Specifically, we've solved the mystery of what accounts for the recent weakness of the stock market. Better still, we're able to dispose of a competing "theory" that really invokes the animal spirits of financial paganism and the mystic belief system of at least one financial industry sacrificial goat entrail reader/"technical analyst". CNBC explains:

Multiple theories have been put forward for the recent stock market weakness, none of them particularly satisfying.

The notion, then, that a lot of the current upset could be traced back to a so-called Death Cross a few months ago in the 10-year Treasury yield seems as plausible as any.

According to an analysis earlier in the week from Abigail Doolittle at Peak Theories Research, the benchmark note's 50-day moving average "crossed" below its 200-day trend, a move that technical analysts believe represents a substantial turn in sentiment that will lead to further market weakness.

In the case of the 10-year yield, the move actually is bullish for bonds and, as is often the case with the relationship between the two asset classes, negative for stocks and the S&P 500 index in particular.

"After the highly bearish trading action of late July, this is worth considering with the 'what's next' question front and center for most investors. There's little doubt that the slicing of the S&P's six-month uptrend was vicious, but it may be less clear what it will mean going forward," Doolittle wrote in a note clients Tuesday. "This is where the 10-year yield's Death Cross enters the equation as a handy tool—'tell'—on what may be ahead for the S&P."

When laughing hysterically, it often helps to take a short time out to catch your breath before continuing on with the thing that provoked your laughter. You'll want to pause now, because the carefully selected and limited number of spooky coincidences are discussed next....

In four previous instances since 2007, the cross has been harbinger of bad things to come. Successive instances in September 2007 and November 2009 preceded a 58 percent drop in the market; in the spring of 2010 the cross helped foretell a 17 percent drop, and a move in late spring of 2011 came ahead of a 20 percent fall, according to Doolittle's analysis.

Political Calculations

Political Calculations is a site that develops, applies and presents both established and cutting edge theory to the topics of investing, business and economics.

Be the first to read Political Calculation's column. Sign up today and receive Townhall.com delivered each morning to your inbox.


Get the best of Townhall Finance Daily delivered straight to your inbox

Follow Townhall Finance!