2 Reasons For a Pullback You Didn’t Think of and 1 You Got Wrong

• Posted by Greg Harmon
• on October 7th, 2011

There are so many traders, investors, prognosticators and shams calling for a pullback in stocks that you might think it is almost certain to not happen. One of the major signals has been the relationship between stocks and bonds. The ratio chart below of the S&P 500 SPDR ($SPY) to the iShares Barclays 20+ Year Treasury Bond Fund ($TLT) has been a leading source for the

conviction. The past three days have created a strong upward move and a bullish 3 Advancing White Soldiers candlestick pattern. But it is extended with gaps in the moves higher and smaller real bodies on the advance. A step back also reveals that it is approaching resistance at the top of a downward channel, with a Relative Strength Index (RSI) that has not been bullish since late July. If it can break through the channel and rise higher then perhaps we will get a major move higher. Until then it is suspect. This is the one you have wrong. But there are two other ratio charts that suggest a move lower in the $SPY. The first is the chart of the $SPY vs the iShares MSCI Emerging Markets ETF ($EEM). It shows a strong surge higher through September but is now testing

support. As it does so the RSI is trending lower and the moving Average Convergence Divergence (MACD) indicator is about to cross bearishly negative. Both support a break lower. The second is the ratio of the German DAX Composite ($DAX) to the S&P 500 ($SPX). This chart shows a bottom that occurred in early September and it is now in a rising channel. The RSI is also trending higher and the MACD is in strong positive territory. So what does this all mean? Flows from Stocks into

Bonds potentially stalling. Flows from US Equities into Emerging Markets gaining steam. Flows from US Equities into the German (think Europe) Equity market. None of these are good signs for the US Equity Market. We will have to wait and see how this plays out but it is not yet the time to get full on bullish on US Equities.

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