As the stock market takes a breather, it’s worth noting that an important market indicator is at a critical juncture. Â With the S&P 500 (INDEXSP:.INX) pulling back a few percent off the highs, a critical stocks-bonds ratio is testing trend line support.
And if that support breaks, it could mean a full blown correction for stocks.
The ratio that I’m using in the chart below is comprised of the S&P 500 ETF (NYSEARCA:SPY) and the Zero Coupon Bond ETF (NYSEARCA:ZROZ). Since the 2014 highs, the ratio has moved in a wide range, chopping back and forth. However, since early 2016, it has been headed higher. But a few concerns have developed of late:
Point (1): Â Potential double top with 2014 highs
Point (2): Â Lower high
Point (3): Â Now testing uptrend support line
If the ratio fails to hold its trend line support, it could suggest further weakness in stocks (relative to bonds). Â And this type of action would hint at a deeper pullback. Â Stay tuned!
And thanks for reading.
Twitter:Â Â @KimbleCharting
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
