This week we’ll take a look at our SPY versus Bonds Relative Strength indicator:
First, you need a basic understanding of stocks and bonds. The bond market is roughly 10 times the size of the stock market. That means when money is flowing into bonds, stocks generally take a hit on the lower liquidity. And vice versa – when money is flowing out of bonds – that money generally will seek higher return, making stocks attractive.
So where are we now?
Ok, I’ll admit, there are a lot of lines on this chart. I didn’t create it for general use, but it has been very good at defining the various stages of the market here.
Here’s what’s on the chart. SPY – blue line; Bonds (TLT) - pinkish line; and the SPY/Bonds RSI – red line.
Generally speaking, when bonds are heading lower, stocks are rising.
A word of caution – while we’re still “Bullish” longer term, bonds are potentially bottoming here – a bounce in bonds means more selling in stocks. So stay tuned.
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