[Chart of The Week] What Intermarket Ratios Are Saying About Rates

March 11, 2020

From the desk of Steve Strazza @Sstrazza

We look at a variety of intermarket ratios that span just about every asset class in order to get a read on interest rates. Here is one that we don't discuss too often, but its relationship with the 10-Year Yield is obvious from looking at the chart below.

The S&P High Beta/S&P Low Volatility (SPHB/SPLV) ratio made significant lows around the same time and place as the 10-Year has several times over the past decade.

Click chart to enlarge view.

But this changed recently...

That is not a data error in the chart above, the 10-Year actually fell over 100 basis points in less than three weeks, a truly historic and unprecedented move, which everyone in the financial industry is currently trying to make sense of. It's times like these, when we are in truly unchartered territories such as the bond market is now, when our detailed knowledge of cross-asset and intermarket analysis is most useful.

The 10-Year is at historically oversold levels and the 5-Year just made fresh all-time lows. Since our potential levels of interest are getting blown out in the bond market, let's look to some more equity market ratios to see what they might be saying about the future for yields.

Here are some of our favorite risk-appetite ratios. They all have strong positive correlations with yields. See if you notice a trend in their charts.

We'll start with the most popular and commonly cited of all, the iShares SPDR Discretionary (XLY) vs Staples (XLP) ratio.

Prices are testing key prior lows and printing a potential failed breakdown.

Many believe Amazon skews that ratio due to its large weighting so here is the equal-weight version of Discretionary vs Staples. Same story as the SPDR ETFs above.

Notice how the ratio is testing key lows from the summer of 2016 similar to the 10-Year Yield and High Beta/Low Volatility charts above.

Next, we have Regional Banks relative to REITs. Regional Banks rely on lending and therefore higher interest rates to make money while Real Estate is a bond-proxy that typically moves in the opposite direction of yields.

Similar to the charts above, this risk-appetite measure has fallen fast and hard to a logical level of support at key multi-year lows. How prices react here will definitely give us a read on the future direction of interest rates.

Last but not least, let's look at the SPDR S&P 500 ETF (SPY) vs SPDR Utilities (XLU), which is another popular bond-proxy sector like Real Estate.

Testing multi-year lows just like the other ratios, yet slightly different in the sense that it is working with a potential failed breakdown and bullish momentum divergence.

So what if all these ratios find support at these levels? And what if the 5-Year Yield ends up printing a failed breakdown after recently undercutting its all-time lows?

Not only would this indicate a tradeable bottom for yields but it would also signal the resurgence of risk-appetite within equity markets. Whether that will bring us a dead cat bounce or a sustained rebound is something we'll have to wait for incoming data to know. But rest assured, we'll be the first to tell you when these signs arise.

On the other hand, these ratios could all fail at these critical levels along with the 5-Year in which case they would confirm the recent price action from the bond market and heighten the probability of yields being lower for longer, and potentially even negative eventually.

Our bet is that in this environment stocks would be under continued pressure and beneath our current risk management levels.

Stay posted because in tomorrow's Mystery Chart Reveal Post we'll elaborate more on what intermarket ratios are telling us about rates, specifically those in Commodities markets.

Thanks for reading and please let us know if you have any questions!

Allstarcharts Team