I’d like to discuss the weekly un-adjusted (not accounting for dividends) ratio between the S&P 500 (NYSE:SPY) and 20+ Year Treasury Bond ETF (NASDAQ:TLT) over the last seven years. As a reminder, when SPY is outperforming TLT, the line rises. And when the opposite happens, the line declines, which doesn’t mean equities are appreciating, it simply shows which data set is rising more (or falling less) than the other.
I think it’s important to monitor the relationship between stocks and bonds and that’s exactly what this chart helps us do. The ratio between these two markets has been in somewhat of a range since late 2013 as it has been unable to produce a meaningful new high or lower lows. This creates a consolidation triangle pattern that we can view as levels of support and resistance with regards to the relative performance of SPY and TLT.
As the chart below shows, the ratio has found prior support at 1.45, which if broken could see a decline down to 1.35 -- the last significant area of price memory (2010 turning point and 2013 slight decline). On the upside, we have a declining trend line connecting the lower highs since 2015. A break here could see SPY outpace TLT with the ratio rising back to its prior high around 1.80. To better gauge a break of either resistance or support -- one will eventually have to happen whether it’s due to pacing of time or price movement. I’ll evaluate trend strength (not shown on chart) to better understand the break's potential ‘staying power’ and the potential of a false break or reversal. But at this point, we have our levels and can be patient, allowing the market to dictate a bias.
