Bonds as a Leading Indicator
According to MarketWatch Top, Wall Street veteran Larry McDonald warns that the bond market is displaying signals similar to those preceding the 1987 crash. Bonds have begun delivering "equity-like returns," a pattern that historically has preceded periods of sharp volatility in equities.
Why It Matters to Traders
This observation is not a prediction, but rather data on the historical correlation between bond movements and subsequent equity volatility:
- Affected Sessions: Shifting correlations between asset classes can impact spreads and volume during trading hours.
- Risk Management: During periods of correlation reconfiguration, traditional risk models may temporarily become unreliable.
- Implied Volatility: Greater uncertainty typically translates into larger intraday swings and stop-level adjustments.
Discipline When Uncertainty Rises
When markets display historical warning patterns, the professional trader's response is not to "front-run" the move, but to reinforce protections:
- Review daily loss limits and position sizing.
- Adjust stops based on expected volatility, not price alone.
- Follow your risk rules without shortcuts.
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