From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley
As investors, we have plenty of options.
We can express a bullish or bearish thesis in a variety of different asset classes - from stocks and commodities to bonds and even forex or crypto markets.
But in making the decision of which one of these areas to focus our attention, we must ask ourselves a critical question every now and then...
Where is the best place to allocate our capital?
Money flows to where it is treated best. And that’s always where we want our focus to be.
Remember, we’re here to make money, not fulfill our intellectual curiosities or express our values.
Lucky for us, determining where the alpha is as simple as performing a little intermarket analysis.
So let’s dive in and do just that.
Earlier this year, when the SPY/TLT ratio hit a key extension level, we knew we were at a logical place for stocks to take a break and bonds to get a shot at taking leadership.
This was a crucial data point supporting our cash, bonds, and champagne mantra.
A mantra that has rewarded us handsomely in the months since.
But will the intermarket landscape continue to favor bonds over stocks?
This is one way to view the current ratio chart of SPY/TLT:
![](https://media-allstarcharts.s3.amazonaws.com/wp-content/uploads/2021/08/SPY-TLT18.4.png)
A bearish divergence in momentum has lead to a topping pattern and a series of lower lows and lower highs.
Does this ratio continue to roll over to the downside in favor of bonds?
Or does it look something like this:
![](https://media-allstarcharts.s3.amazonaws.com/wp-content/uploads/2021/08/SPY-TLT28.4.png)
A bullish divergence in momentum leads this ratio higher after a short corrective period.
We ultimately believe this relationship does resolve higher in favor of stocks.
But it’s most likely not going to be tomorrow or even next week.
Until then, we will keep a close eye on this chart and, of course, one of the largest markets in the world, the bond market.
There’s a lot of wisdom in the bond market. We just have to listen.
As always, let us know what you think. We love hearing from you.
Thanks for reading, and be sure to download our new Bond Report below!
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