Chart Of The Week: U.S. Stocks vs U.S. Bonds

JC Parets
September 19, 2017

Are stocks in the 9th year of a bull market? No. Not even close. I would argue we might even be in the first year. You can see some of my list of reasons outlined here in Modern Trader Magazine earlier this year. Another major component of what I consider to be a structural bull market is a relative outperformance compared with other assets. When we're looking at U.S. stocks, I think the obvious comparison is vs U.S. Treasury Bonds.

Today we're taking a look at the S&P500 ETF $SPY vs the U.S. Treasury Bonds ETF $TLT. The comparison is very simple: Stocks or Bonds? One argument I can make why we're not even through the first year of this structural bull market is because we have gone absolutely no where since 2007 relative to Treasuries. This has been a dead money trade for a decade. Late last year the ratio did break out to new highs, signaling to us that this was the beginning of a new move higher after 10 years of consolidation since that historic top in 2007, not the end:

spytlt1212

We have gone sideways within two converging trendlines since late last year. The question here is: Does this look like a major top for this ratio, signaling a flight to safety into U.S. Treasury Bonds and away from the U.S. Stock Market that is, according to some frustrated participants "overvalued"? Or is this just a healthy consolidation within an ongoing uptrend, and the real 25% move higher is about to start?

If we were below 18.50 and this ratio was under all those former highs, then I could argue that this has been a major failed breakout and look out below. That would be reason to question any and all bullish outlooks towards U.S. Stocks, and stocks as an asset class for that matter. But we're not below the highs from the past 10 years. We're above them. The path of least resistance here, in my opinion, is not just higher, but a lot higher. I don't only think stocks rally a little bit vs US Treasury Bonds, I think they can see much higher levels. You see my targets here over 25% higher towards 26:1.

If this ratio goes up, what does this mean? Can they both go down together? Absolutely. Can they both go up together? Totally. Now, if bonds are selling off, is that because stocks are going down too or because that money is coming out of bonds and into stocks? We're putting our money on the latter.

Let's look at this another way. Here is a closer look at the ratio. You can see that overhead supply above 18 since 2014 and 2015. We finally got the breakout last December and have been consolidating those gains since March.

SPY-TLTnowhip

I think it's fair to say that was a well-deserved period of digestion after the epic run from early 2016. I would also argue that 6 months is enough time, especially with momentum in a bullish range and an upward sloping 200 day moving average. The point is not whether or not we're in the first, second, third or fourth year of a bull market. The point is I believe we are closer to the beginning than we are to the end.

Here is a different look. I can also make an argument that all the noise earlier this month scared some weak hands and shook them out of this market. That can very easily be the catalyst to send this ratio much higher:

SPY-TLT2222whipsaw

To me this is the higher probability outcome: a drive much higher in stocks and rates while bonds and other risk assets come off, U.S. Treasury Bonds in particular. If we are below 18.50 in this ratio, then we might be able to talk about some other alternatives. But if that's not the case, I don't want to hear it. We need to be buying stocks very aggressively. Not passively. We want to be buying with both hands.

Cheers,

JC

Advisors Corner

  • Allstarcharts Members: Click here for Advisors Corner

 

 

Tags: $TLT $SPY $SPX $ZB_F $ZN_F $IEF $ES_F

Filed Under