Stocks Vs Bonds: Who's Lying?
Arnout Ter Schure | Jun 10, 2016 11:14AM ET
Common wisdom tells investors that bond prices drop when stocks go up and vice versa; also know as risk on vs risk off. This is for most of the time a true negatively correlated relationship. But, what happens when this correlation disappears? Lets take a look at the S&P 500, SPY (NYSE:SPY), and iShares 20+ Year Treasury Bond (NYSE:TLT) since TLT's inception in 2002; see figure below.
The blue line is the SPY:TLT ratio, reflecting the stock vs. bonds relationship. The black line is the S&P 500. The chart clearly shows for most of he time when the ratio goes up the S&P 500 goes up; and when the ratio goes down the S&P 500 goes down. Hence, our common wisdom is correct. But, there are a very exceptions; and those occured mid- to late-2007, early- to mid-2011 and throughout 2014. These are shown with the green and red lines. During those times the SPY:TLT ratio went down while the S&P 500 continued higher. In each case the S&P 500 was lying and had to correct or downright crash. The bonds were telling the truth: the smart money was already moving into bonds as the end-game neared.
Unfortunately, for the the stock market, we curently see another -now rather massive- divergence between the S&P 500 and the SPY:TLT ratio. The latter has been decreasing in a stair step fashion since mid-2015, while the S&P 500 has been range bound, oscillating between around SPX1800-2100, and it is currently only less than 2% below its May 2015 all time high. Hence, based on this 13+ year long relationship the odds tell us that the stock market is once again most likely lying and the SPX2121 high, which we correctly foretold 2 days ago (see here ), may very well be a very significant high.
Get The News You Want
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.