Stock/Bond Ratio Projects Exciting Times Ahead

Are stocks ripe for a deeper correction or is the 5%+ January hiccup – the biggest in well over a year – already in the rearview mirror? The stock/bond ratio provides a dimension not often considered.

The S&P 500 (SNP: ^GSPC) just had its first 5%+ correction in well over a year.

Some say that’s bullish, because it brought prices down to levels that spark new buying. Others point to a potentially bearish technical breakdown at a time when stocks are over-loved, over-valued, and over-hyped.

Which one is true?

As the old saying goes, there are always three sides to an argument: His, hers and the truth.

The stock/bond ratio provides another dimension to this ‘argument.’

We use the SPDR S&P 500 ETF (NYSEArca: SPY) as proxy for stocks and the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) as proxy for bonds.

The S&P 500 ETF – SPY/IEF ratio chart below shows the SPY/IEF ratio vacillating between support and resistance.

The SPY/IEF ratio rises when the S&P 500 moves higher and bonds move lower.

A spike in the SPY/IEF ratio accompanied every S&P 500 high. This includes the most recent January high.

However, the SPY/IEF ratio did not touch resistance at the most recent high. It also didn’t touch support at the most recent low.

Nothing says that resistance or support need to be met, but often such support/resistance levels act as magnets.

If the SPY/IEF ratio is still in need of touching both support and resistance levels, as a result, we conclude that the January high didn’t mark a major top and last week’s low didn’t mark the end of this correction.

Obviously, this would translate into exciting times ahead.

A detailed forecast for the S&P 500 is provided here:

S&P 500 Forecast: Short-Term Gains vs Long-Term Pain

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

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Weekly ETF SPY: TLT – 30-year Treasuries

Will falling Treasury prices be the beginning of a higher interest rate environment? Banks would hate that kind of tinkering with their easy money spigot, but retirees would love it. Here’s a comprehensive look at Treasury prices and yields.

On May 3, we highlighted a bullish breakout for the stock/bond ratio, which implied higher stock and lower bond prices.

Since then, 30-year Treasury prices have suffered the worst decline in quite a while. What’s next for long-term Treasury prices?

Chart #1 shows the performance of 30-year Treasury futures, the purest representation of 30-year Treasury prices.

Prices have broken through two important support levels/ranges (red line, bar), which has taken all the steam out of the up trend.

There are some support levels near current prices. This should cause a recognition bounce, but lower prices seem likely. RSI is closer to a new low than Treasury prices, which suggests that selling is broad based.

Things looked more promising two months ago at the bullish breakout (green circle). On March 17, the Profit Radar Report wrote that: “With prices back above trend line resistance the move may be strong enough to lead to higher prices. A small pullback to about 142.18 would provide a lower-risk entry point compared to chasing prices.” The pullback to 142.18 occurred the next day.

The April 28, Profit Radar Report warned that a close below 147.18 “would be the first red flag.” Even more, it was the beginning of the end, at least for the previous rally.

The chart of the iShares Barclays 20+ Year Treasury ETF (TLT) looks slightly different, but sings the same song of worry. Chart #2 shows TLT hovering aimlessly between support and resistance.

As Treasury prices decline, yields rise (and vice versa). This inverse relationship makes it interesting to also take a look at 30-year Treasury yields, illustrated by chart #3.

Yields are sandwiched right between red trend line resistance and green trend line support. Yields have not yet broken above long-term trend line resistance. A close above 3.16% is needed to confirm the breakdown in prices.

Summary: Long-term Treasuries are likely to see lower prices, but I would wait for confirmation in the form of a bullish yield breakout.