For the market to experience a meaningful correction, we need to see clear signs of defensive rotation—and so far, that hasn’t happened.
In the bond market, U.S. Treasuries are viewed as the defensive play, especially compared to their High Yield counterparts.
It’s the same concept in equities when you compare Consumer Staples to the broader S&P 500. If the environment favors risk-taking, both Treasuries and Staples should underperform.
Overlaying the Treasuries versus High-Yield ratio (IEI/HYG) with the Staple vs S&P 500 ratio (XLP/SPY), you’ll notice they move in the same direction.
Currently, both are trending lower and making new lows, signaling no defensive positioning from bond or equity investors.
As long as these lines keep trending down and to the right, there’s nothing to worry about for risk assets. But if they start to turn higher, that would be a key warning sign of trouble ahead, potentially signaling a deeper correction in the market.
I’ll be diving into this and more during our NYC event, January 28-30. Hang with the All Star Charts team, catch the NYSE closing bell, and connect with top traders.
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Alfonso
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