Traders Staying Cautious During Advance in Equities

Bonds aren’t the only place investors go in order to search for yield. Dividend stocks have increased their time in the spotlight as bond yields have stay stubbornly low. The SPDR S&P Dividend ETF ($SDY) is one of the more popular choices when looking for equity-related yield.

We can use this lower-beta ETF in relation to the larger S&P 500 SPDR ETF ($SPY) to get a feel for investor sentiment based on which security is outperforming the other. When traders are looking to maintain equity allocations but want to take some risk off the table they will often look to the more defensive sectors and higher dividend paying stocks to accomplish this. These types of shifts often cause $SDY to outperform $SPY during periods of ‘risk off’ trading.

The chart below shows the ratio between $SDY and $SPY, as you can see the pair has been trading in a large symmetrical triangle. While the S&P 500 is currently testing its September highs, $SPY has been unable to outperform its dividend-counterpart to get the ratio also back to its September level.

SDY SPYWhat this shows us is that while the large cap equity index has been in an uptrend off the recent low in November, there doesn’t appear to have been a shift in relative performance between the dividend ETF and the S&P 500. It seems that traders have been staying cautious during this advance in equities, preferring to stick to the dividend space, causing the ratio between $SDY and $SPY to be essentially flat over the past several weeks.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+.

About Andrew Thrasher, CMT

Andrew Thrasher, CMT is a Portfolio Manager for an asset management firm in Central Indiana. He specializes and writes about technical analysis as well as macro economic developments.