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?

SPY Bonds Relative Strength Indicator

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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