S&P Bond Ratio

[jpmcewen]

What would be the best way to approach analyzing the ratio between the S&P and Bonds? From time to time (according to what I read below), a correlation grows and then wanes between the S&P and Bonds and I'd like to be able to analyze that better. I know there is a Correlation study in Thinkscript that I need to dig into but wanted to ask what others on this site think or have tried.

Also any thoughts on what the best bonds or bond index (or other proxies) may work well with the S&P is appreciated.


From Jack Schwager's Stock Market Wizards

Another trade I do is the bond ratio trade. The bonds and S&P are like a couple. The bond market always leads, so it is the female, because the male always follows the female. When a couple first start to date, they don't know each other yet, and they will be a bit out of O F I harmony. On analogous markets days, when the bonds go up, the S&P may also go up, but it won't follow very tightly. Then they get engaged, and the relationship becomes closer. Then they get married and go on a honeymoon. When they are on a honeymoon, everything they do is synchronous. On "honeymoon days" in the markets, when I see the bonds go up a few ticks, I know the S&P will immediately follow, and I will buy the S&P for a quick trade. After the honeymoon, when they settle into married life, the bonds will drag the S&P husband along, but they are not quite as joined as they once were. Then the couple gets estranged, or in market terms, whenever the bonds go up, the S&P will likely go down. Then comes the bitter divorce. On "divorce days" the bonds and S&P will move in exactly opposite directions. Every day, I make a determination of what type of day it is. Today, for example, the bonds were going up, and the S&P was selling off. The Street called it a "flight to quality," but to me it was just a "divorce day."

 

[jpmcewen]

Is it best to correlate prices, volume, delta of prices and volume, etc.? What about the time variance in price/volume when one leads the other?

Questions like these are really what I'm asking, not necessarily S&P vs Bonds. Technically the symbols are less of a concern then what to compare and how to deal with variance between the two. Also what if the correlation cycles (stronger to weaker to stronger).