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Chart Advisor: Stocks Extend Lead Over Bonds

Posted September 29, 2023 at 7:43 am

By David Rath, CFA, CMT

1/ SPY vs TLT Continues Climb

2/ High Beta vs Low Vol Struggles to Break Through

3/ Discretionary vs Staples Turning Lower?

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1/ SPY vs TLT Continues Climb

There are a few ways to define the push and pull between stocks and bonds. One such relationship is between the SPDR S&P 500 ETF (SPY) and the iShares 20+ Year Treasury ETF (TLT). We talked about the breakdown in absolute terms on the TLT chart a couple of days ago, but this ratio chart shows how pronounced the outperformance of stocks has been over the last few years.

I saw quite a few people calling for bonds over stocks at the beginning of this year and for good reason. The economic outlook was bleak and people were predicting 100% chance of recession. I wanted to see a meaningful breakdown of this upward channel before picking sides. The last couple of months, it’s been a case of stocks losing less as the ratio rides the upper bound of the channel. One thing to keep an eye on: the stark divergence in RSI that is currently forming. Mean reversion is a powerful force.

2/ High Beta vs Low Vol Struggles to Break Through

The relationship between high beta (SPHB) and low volatility (SPLV) stocks is one way to ascertain market participants’ comfort with risk. We saw the ratio skyrocket from the COVID abyss to peak around March 2021. Since that peak, there have been three distinct attempts for the ratio to break above its resistance zone. Each time the ceiling has sent the pair back down to regroup.

It’s been said that the more times a level gets tested, the more likely it is to get broken. Let’s see if it gets another crack at it.

3/ Discretionary vs Staples Turning Lower?

Another such ratio to take the market’s temperature is the ratio between consumer discretionary stocks (XLY) and consumer staples (XLP). Some would argue using the equal-weighted version of the two sectors due to Amazon (AMZN) and Tesla (TSLA) occupying such a large weight in XLY, but the charts are similar.

On the backs of a resilient consumer, we have seen this ratio lead the charge from the end of 2022, carrying the broad market with it. After breaking through resistance and then retesting what then became support, the ratio looks like it might be running out of steam. A bearish RSI divergence has formed and confirmation by dropping below support would likely change the character of this market.

Originally posted 29th September 2023

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