In yesterday's posting, I took a look at the close intraday relationship between T-note yields and the S&P 500 market.

Specifically, when note yields have risen (which means that the prices of notes are declining), the stock market has tended to rally. When note yields have fallen (rising note prices), the stock market has been under pressure. My interpretation of this relationship has been that it is mediated by price changes in the crude oil market. When oil prices have jumped, this has raised fears of economic slowdown. Although this pressures stocks, it is positive for note prices, since it promises lower inflation--and less need for Fed tightening--down the road. During the last two days, when oil prices have risen by more than 5% due to the impact of the hurricane, keeping a keen eye on oil and notes has helped S&P traders stay on the right side of intraday swings.

My statistical work bears out these relationships. From January, 2003 through August, 2005 (N = 665), we have had 382 days in which the T-note futures have been up in price and 283 where they have been down. The average four-day S&P 500 futures price change following an up day in the T-notes has been .11% (208 up, 174 down), while the average four-day change following a down day has been .27% (169 up, 104 down).

Over that same period, we've had 377 days where the two-day price change in crude oil futures has been up and 288 days where it has been down. The average five-day S&P futures price change when oil has been up has been .07% (200 up, 177 down), while the average five-day change following a two-day drop in oil has been .42% (180 up, 108 down). Given that the last two days have seen a rise in oil and note prices, recent history suggests subnormal returns over the next week. As a discretionary trader who nonetheless utilizes statistical work to gain an edge, I will be looking for sell setups intraday, all else being equal.

Brett N. Steenbarger, Ph.D. is Associate Clinical Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY and author of The Psychology of Trading (Wiley, 2003). As Director of Trader Development for Kingstree Trading, LLC in Chicago, he has mentored numerous professional traders and coordinated a training program for traders. An active trader of the stock indexes, Brett utilizes statistically-based pattern recognition for intraday trading. Brett does not offer commercial services to traders, but maintains an archive of articles and a trading blog at www.brettsteenbarger.com.