Seismic Shift
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One of the charts I’ve been watching closely for the past year is the one below. It connects so many pieces of the market to tell one story.
Plotted are long-term treasury bonds (TLT), gold, and various equity ratios (Growth:Value, Large:Small, and US:Foreign). All of these are related.
From mid-2018 to mid-2020, stocks have been in a very volatile sideways market. It makes sense that over that time, bonds went up (flight to safety). Gold also benefits from an uncertain equity market and falling bond yields (ie. less opportunity cost).
Falling bond yields boost the Growth:Value ratio (I wrote a simple explanation of why here). They also boost the Large:Small and US:Foreign ratios. Why? Because US large caps (S&P 500) are more tilted towards growth while US small caps and foreign stocks are more tilted towards value, as the table below shows.
Then by mid-to-late last year, a seismic shift began.
Stocks entered a new bull market after breaking out of 3-20 year bases. And as the chart above shows, that’s around the time that we saw a peak in bonds & gold, and relative weakness in large-cap growth stocks (FAANGM).
It’s also when we started seeing relative strength in foreign stocks, small caps and those awfully dreaded value stocks. Materials ETFs (COPX, REMX, LIT) have been on a tear. This is all consistent with strong global growth.
Not shown on the chart is the US dollar. Like gold and bonds, it did well from mid 2018 to mid 2020 (flight to safety). Since then, it’s been in a strong downtrend, helping boost VEU.
Let’s take a closer look at all the recent market action.
IEF Weekly. Bonds are breaking down after being in a strong uptrend since late-2018.
SPY:GLD ratio is breaking out, just like it did in 2013. After all, it’s a bull market for stocks.
SPY:VEU ratio is breaking down. Again, foreign stocks are just now coming out of multi-decade bases (compared to the US which broke out in 2013). “The longer the base, the higher in space” they say.
FAANGM:QQQ ratio made a false breakout. Yes, it has recovered a lot this week, but the bigger picture still looks a little precarious.
All the above nicely ties together several of my recent posts: