The Bond Signal Pointing to More S&P Highs Ahead

The S&P 500 Index (SPX) is now outperforming the iShares 20+ Year Treasury Bond ETF (TLT) on a year-to-date basis, which could suggest the recent stock rally has legs

Nov 25, 2016 at 11:46 AM
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Since the presidential election, U.S. stocks have been on a tear, with the S&P 500 Index (SPX) and its fellow indexes notching all-time highs. As such, stocks are now outperforming U.S. Treasury bonds -- as measured by the SPX and iShares 20+ Year Treasury Bond ETF (TLT), respectively -- on a year-to-date basis for the first time in 2016, setting off a signal that could indicate the current rally is just getting started.

SPX vs TLT 1 Nov 25

Looking at data since 2004, when stocks outperform bonds on a year-over-year basis, the S&P averages a smaller one-month return than when the roles are reversed -- 0.4% compared to 0.73%, respectively, according to Schaeffer's Senior Quantitative Analyst Rocky White. However, going out to six months and a year, the S&P's average returns are much greater when stocks lead bonds year-over-year. In fact, the S&P has been positive a whopping 83.2% of the time one year after these signals, compared to 70.2% when bonds outperform stocks.

You'll also note that the average positive and negative returns are much smaller after stocks overtake bonds. For instance, the average six-month S&P loss is 17.87% when Treasuries outperform stocks -- more than three times the average loss of 5.24% when the roles are reversed. That lower-volatility trend is reflected in the standard deviations, which are practically twice as high across the board when bonds are outperforming.

SPX vs TLT 2 Nov 25

In green below are the times when stocks were outperforming bonds year-over-year, going back to 2004. Echoing the data above, this situation bodes well for the S&P over the next six months/year, even as several signs point to a short-term breather for the index after its rapid-fire ascent.

SPX vs TLT 3 Nov 25


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