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The Stock Bond Correlation Cycle

|Includes:SPDR S&P 500 Trust ETF (SPY), TLT

A couple of months ago I posted this chart on Stocktwits. The main thing I am looking at is the SPX:TLT correlation cycle. I also included the views of USD, TLT and SPX for analysis purposes. I'd like to say that i'm not very experienced with cycles so I might be way off base. However, I found some neat things that may mean something to somebody!

Notice the SPX / TLT correlation cycle bottomed in February 2011 while stocks were in a topping phase and bonds were bottoming. This same scenario happened again just a few months ago in January - February.

In 2011, as the cycle turned up, bonds turned up and stocks continued in a topping phase. Then as the correlation cycle peaked and turned down in 2011, stocks suffered a significant draw-down.

Since the cycle bottom SPX is up 6% while bonds have completed a bottoming phase and are up 8% off the lows. In 2011, TLT rose 12% into mid summer before SPX topping completed. The largest notable difference in the two occurences is that SPX has been rallying and not just loitering in a toppy range.

Given that evidence, i'm not trying to predict a 20% sell-off, but this could mean we see relative weakness (at least) in stocks this summer.

(click to enlarge)Click to enlarge

I also find it interesting how cycle troughs two and three occurred while bonds were in topping phases and signaled bull market corrections AT the lows.

Maybe all this will be useless in the future, or maybe at some point this could be a valuable piece of evidence. Who knows. Thanks for taking your time to read this. Good luck out there!

I'd love to hear some thoughts on this. What do YOU think?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Stocks: SPY, TLT