Watch Nasdaq, Bond Ratio for Rotation Signs: Technical Analysis

Investors should look to the relative performance of technology shares versus U.S. Treasury bonds for signs of a long-term shift favoring stocks, according to StockCharts.com Inc.

The price ratio between the Nasdaq Composite Index (CCMP) and 30- year bonds has climbed to 22.5, more than doubling from its 2009 bottom and close to the 2007 peak of about 25, according to data from the Redmond, Washington-based firm.

The Nasdaq index, in which computer-related companies contribute 52 percent of the weight, this week reached its highest level since November 2000 after Apple Inc. announced its first dividend in 17 years and said it will buy back $10 billion of stock.

“The recent upside breakout in the Nasdaq may be signaling that the long-term outlook for stocks is improving,” John Murphy, a technical analyst at StockCharts.com, wrote in a note today. If the Nasdaq-bond ratio is able to exceed its 2007 peak, “that would be a strong sign that the long-term pendulum has swung away from bonds and back to stocks.”

The bursting of the technology bubble in 2000 and the worst financial crisis since the Great Depression had prompted investors to seek safety in fixed-income investments, with individuals withdrawing money from equity mutual funds for a fifth year. The rally in bonds sent the 30-year yield to an almost two-year low of 2.69 percent on Oct. 4, a day after the Standard & Poor’s 500 Index fell to its 2011 low.

Stocks, Yields Climb

The S&P 500 has rallied 11 percent this year as earnings beat analysts’ estimates for a 12th straight quarter and data on housing and the labor market boosted optimism about the world’s largest economy. The yield on 30-year bonds climbed to 3.49 percent on March 19, the highest level since September, according to Bloomberg data.

The benchmark index for American equities tumbled 0.7 percent today to 1,392.78, while Treasuries rose for a third day as global manufacturing data and a disappointing forecast from FedEx Corp. undermined confidence in the global economy.

A more-significant shift into stocks may not happen until the Federal Reserve stops purchasing Treasuries to keep yields “artificially low,” according to Murphy. Fed Chairman Ben S. Bernanke has kept the central bank’s benchmark interest rate near zero since December 2008 and expanded the Fed’s balance sheet with two rounds of asset purchases totaling $2.3 trillion.

“The Fed is encouraging investors to stay in Treasury bonds too long,” he wrote. “That’s preventing a rotation out of bonds and into stocks which normally takes place near the end of a deflationary period,” he said. “But it may not be too soon to start planning for that to happen.”

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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