The bad news: (1) ISM number was weak, and (2) the risk-on vs. risk-off chart below remains weak. The good news: (1) the chart below is trying to hold near point F, and (2) silver is outperforming gold today, which shows some belief that central banks can “successfully” inflate. The chart below has been updated. The description of the chart has been provided again FYI.
On August 28 and August 30, we pointed out some caution flags on the chart of the S&P 500 (SPY) relative to intermediate-term Treasuries (IEF). While the chart that follows looks complex, it is based on the simple concepts of support and resistance. When the ratio is rising, stocks are in favor relative to bonds (see chart below). When the ratio is falling, bonds are strong relative to stocks. An updated version of the chart as of Thursday’s close is presented here; the stock/bond ratio is at the top with the S&P 500 below it.
- Points A1 and A2 (see chart) show the twin peaks made by the S&P 500 last spring. Points B1 and B2, which occurred simultaneously with the stock market’s peaks, show where the stock/bond ratio (SPY/IEF) was rejected by the downward sloping blue trendlines (acting as resistance for risk).
- Points C and E show where the stock/bond ratio is running into similar resistance in the present day. The red arrow to the left of B2 shows an important support break for “risk” relative to “risk-off” (see gap to left of arrow). The break of support for risk in April occurred on the same day the S&P 500 peaked at point A1.
- Point E shows a similar break of risk-on support that occurred on August 30 (this week). The two red arrows show similar support breaks for risk relative to risk-off. The horizontal line F could act as support for risk in the days ahead, meaning we must keep an open mind about where stocks go from here.
- The blue arrow shows the S&P 500 flirting with a break of support near 1,400 (bottom of chart). If stocks remain weak, point D shows an area near 1,388 where buyers may become interested again.