In February we noticed some very short term negative divergence between the SPY and TLT (the 20+ years treasury bonds ETF ): see here. This short term divergence was negated (divergence is only divergence till it isn’t), as stock markets moved higher.
However, large scale negative divergences often foretell of a larger pending correction (see Figure 1). Currently there’s clear negative divergence between late-February and now: stock markets are up, but also TLT. In fact TLT is up more, hence the SPY:TLT ratio is lower now than it was back then: investors are seeking the safety of treasuries, despite (marginal) higher stock prices.
Figure 1: SPY:TLT ratio over the past 10 years.
The last time, such a scale of divergence occurred was during Q2 of 2016 (April-Jul), and the S&P500 then dropped ~130p before rallying again. Since there’s no negative divergence on the time frame as in 2007, 2011, 2014 and 2015 (several Quarters long), we don’t expect the next correction the SPY:TLT ratio is foretelling us to be of those magnitudes (multi-month), but instead be off the prior magnitude or less.
Given that we still anticipate a rally to ~SPX2500 before the next larger correction ensues, it seems a health dose of selling and fear is needed to allow for the next ~150-200p rally.