Readers of my June 8th newsletter, A Warning in Bonds? remember how I discussed how the bond market can provide an advance warning about a stock market correction.
I like to monitor the ratio between the US bonds and the S&P 500 index in order to get some sense of what the “smart” money is doing.
For this, I use the TLT ETF for the US 20+ Year Treasury bonds and the SPY ETF for the S&P 500.
This strategy proved to be very effective during January 2020 when Bonds began outperforming the S&P 500 on a relative basis.
At that time, we became cautious and began reducing our long exposure to equities and the market indices.
The chart below compares the TLT ETF vs the SPY ETF.
The green line in the chart represents the 50- Day Moving Average commonly used as a reference for intermediate-term trends. A price above the 50- DMA is considered innocent while below is considered guilty.
As the chart above suggests, the “smart” money is allocating capital to bonds at a faster rate than the S&P 500 and a new intermediate trend has begun.
What does this “smart” money risk-off strategy tell you?