Treasury Yield Curve and long term S&P price action

In this inaugural post for Hylland Research, I want to take a step back from the specific sector of technology, and emerging tech companies (where I hope this goes in the future), and look at the broader market.

There is lots of talk on the street of the yield curve, and its record steepness, which is shown below thanks to Bloomberg.


I wanted to see how the S&P 500 has acted in relation to the yield curve in the past. In search of this, I found a really cool tool at Stockcharts.com. Here is the evolution of the yield curve since 1990 compared to the S&P 500:

Capture your screen in seconds

In an attempt to see this a little better, I made 2 quick and crude indicators. They show the slope of various points along the yield curve as a histogram that we can look at. I apologize that they are just in a spreadsheet now. One of these days I will get better at C++ (or find a charting software I like) to make this more presentable.
The top indicator shows the slope of the front end of the yield curve (1-7 years), and the second is the slope of the long end (7-30 years).

yieldcurveslopevssnponlygraph

Publish at Scribd or explore others: Business & Economics Research custom indicator yield curve

After glancing at this, I notice a couple things. First, (obviously) we are at an all time extreme for yield curve slope. This type of extreme has only occurred at long term bottoms in the stock market. (note, that is a weekly S&P chart). I notice a lot of similarities between the 2002 "bottoming process" and today's situation.

I am as much of a bear as anyone. The obvious arguments against this bullish outlook is that we are experiencing unprecedented levels of government and federal reserve involvement in the markets. Also, if our situation is indeed worse than 2002 (which seems like it is), then the indicator means much less in terms of hinting towards a market bottom.

If I had to invest here I'd look at a shorting the front side (1-7year) of the treasury and be slightly short the general market. I am looking for the yield curve to flatten, while carefully watching for a "breakout" on one of these indicators. I would have less money in the general market short, but I do see some indicators such as MACD showing topping signals.

My idea of a pretty good portfolio right now would be something like this:

Its a little boring, and I would be writing covered calls on everything in that portfolio that had options.
I just don't like being long stocks right here until we either see a breakout in the general market (S&P over 940) or until we get closer to retesting 666 on the S&P. Bond ETF's with covered calls (and collecting their dividends) just seems a little safer right now.