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Jones futures are the best stock market indicators we have. Unless you have more confidence in your tarot cards.

The Bond Effect

Here I go again. First I re-opened the subject of futures. Now I am moving over to bonds which was also covered in a previous chapter. By now I am sure you are aware of the fact that in the world of finance and money, no market can operate independently from another. All of the various markets somehow relate to each other.After all, money is the oil that lubes their engines and as it moves out of one market, it is probably flowing into another one. And one cannot talk about stocks without considering bonds. Previously I discussed that bonds are debt notes created by many institutions (including the US government). They are used by the issuers to borrow money from the buyers, with a promise to pay it back with a stipulated interest. We also learned about the all important benchmark bond, the 30-year Treasury bond (a.k.a. long bond). When you tune in to your favorite financial program in the morning, you will notice that among the market open indicators (e.g., S&P futures), the long bond is also mentioned. Why? And what is the relationship between the stock market and the bond market?

Rather than throwing you for a loop, I’ll try to give you a simplified version of this relationship. Certainly there is a lot of theoretical and complex material on this subject. We’ll just take the easy road here, as that is the goal of this book. Just to be clear, here I (as do many others) use the benchmark long bond as the representative for the bond market. (Again, the 10-year note has also become a significant benchmark in its own right.)

Investors and traders as a general rule are a nervous bunch. They do take risks, but at the end of day they want to make sure that their money …