Well it seems Mr. Market has been able to regain the important 1600 level in the S&P ($SPX), likely giving a little confidence boost to equity bulls. Things also appear to be fairly strong morning as the e-minis hit higher highs before the opening bell. As stocks regain their footing I wanted to bring up this ratio chart of S&P 500 SPDRs ($SPY) and the iShares Investment Grade Corp. Bond ETF ($LQD). During the short correction we saw bonds tumble right alongside equities, which is something we don’t see happen very often. During the month of June we can see in the chart below, $SPY has been trekking higher, slowly hitting higher highs in relative performance against its bond buddy $LQD. However, it’s not all roses and sunshine as we can see in the top panel. The Relative Strength Index (tired of me talking about the RSI yet??) has been diverging – hitting lower highs.
So we have an interesting setup taking place. I’ve put in some rough trend lines on both the momentum indicator as well as the ratio of stocks vs. investment grade bonds. Going forward we will see if RSI can breakout from its falling trend line, restoring confidence in equities outperformance of corp. bonds. In a ‘normal’ market, something like this would be a warning flag to a continued ‘risk on’ rally, but with the potential changes in Fed action many traders are beginning to wonder – is this time different? We shall see.
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