No One Is Winning

There has been a battle brewing since the beginning of the year in the securities markets. It is taking place on many fronts. The stock market, as measured by the S&P 500 ($SPX), has been moving sideways in a range. Bulls and Bears fighting it out. After just 3 months some of the rhetoric is getting downright smug and nasty too. As for Treasury Bonds ($ZB_F), they have also been in a battle. Macro focused traders see rates backing up but the some others see a rally in bond prices. What has been actually happening is a slow slog to the right.

It is often said that the bond market is smarter than the equity market. This undoubtedly grew out of a different era when bond market participants all had degrees from the best colleges while stock traders may have gone to college. But it has evolved to the perception that the bond market is right and the equity market will eventually come around to its way of thinking. This is of course another tall tale of Wall Street and can be right sometimes and wrong sometimes. And the current environment is making for a very unclear picture as to which is ‘right’ about the next move.

spy-tlt

The chart above says it all. It is a chart of the SPDR S&P 500 ETF, $SPY, against the 20+ Year Bond ETF, $TLT. The blue rising trend support line shows that even if you start to measure after the strong move higher in the ratio last Spring, that the trend since July remains in favor of equities. The recent weakness in stocks measured against the strength in bonds has also pulled back to the 200 day Simple Moving Average (SMA), a spot where traders often get interested in reversing their trade. But there are some arguments in favor of the bond side as well. The red falling channel is one. The falling RSI and MACD are another, although if the RSI reversed at the 40 level it would remain in the bullish zone, in favor of equities. It is not clear cut either way.

For my money, there is not a clear signal from this indicator until it either breaks below the blue line or above the upper red line. Until then there will continue to be debate and it will likely grow more hostile and entrenched. Keep an open mind and let it tell you which will win, not a loud-mouthed entrenched viewpoint.

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