Lengthened bond MACD as an equity regime filter

A bond MACD read as an equity climate

The archive estimates a lengthened MACD line on a bond-price series and then reads the sign of that line as an equity climate. The oscillator is not drawn on the equity chart. It is estimated on a bond average and only afterwards carried across to stocks.

That step is an intermarket lead: a change in the bond-price trend is treated as a precursor of equity-market direction, rather than as a contemporaneous stock oscillator.

Conventional weekly construction

The conventional weekly MACD line is the gap between a 12-week exponentially smoothed average of closes that uses a 0.15 smoothing constant and a 26-week average that uses a 0.075 constant. That MACD line is then smoothed again with a nine-week signal line that uses a 0.2 constant.

The lengthened averages

The longer-horizon variant replaces those lengths with a 66-week exponentially smoothed average using a 0.0299 smoothing constant and a 33-week average using a 0.0589 constant. A positive difference is treated as a buy state and a negative difference as a sell state.

How each average is updated

Each exponentially smoothed average is updated recursively as the prior average plus the smoothing constant times the gap between the latest close and that prior average. The first update starts from the previous close.

Zero-line crosses on the bond average

On a Dow Jones industrial bond average, an upward zero-line cross of the MACD histogram is presented as a shift toward lower yields. A downward cross is presented as the opposite rate-trend change. A rising bond average corresponds to falling yields.

The MACD histogram here is a bar display of the MACD-line value. It is used to mark those zero-line crosses, not as a separate oscillator on equities.

Reading the crosses into stocks

Those bond-trend crossings are then read across to the Dow Jones Industrial Average as a leading equity-regime signal rather than as a contemporaneous oscillator on stocks.

Eight intermediate equity climates

The 1978-92 span is partitioned into eight intermediate equity climates according to whether the bond MACD was positive, described as a favorable stock backdrop, or negative, described as unfavorable.

Two late-sample equity shakeouts that carried the NYSE Composite below its 40-week average, in November-December 1991 and June 1992, were not confirmed by the bond-equity MACD filter.

The illustrated bond histogram is associated with an early 1982 equity entry and with an exit months before the October 1987 decline. A later buy state is dated from late 1990.

A note on the worked spreadsheet

The worked spreadsheet defines the indicator as the 33-week exponentially smoothed average minus the 66-week average. It also notes a broader 20-bond average than the industrial-only bond series used in the main charts.