The Giant Stock/Bond Spread

bridging_the_minds_18253

I've got some important information to share with you.

The normalized spread between stocks (SPY), and bonds (TLT) is now 7.95 – the highest level since 2011.

Here’s a chart:

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The spike up in stocks, and the drop in bonds is the opposite what we initially saw after the Brexit vote.
I got a lot of flack back in June for being bullish on stocks during the 5% decline — but by the end of the Smart Money trade, that signal made 9%.
Not a huge gain, but 9% here and there really adds up quick.
The normalized spread (yellow in the above chart)– and when I say normalized, I mean adjusted for volatility — at that time hit -8.47 before soaring up to +3 a month later.
Since the 90's, that spread has bounced up and down like a yo-yo just like you see in the chart above.
Over-bought to over-sold, back to over-bought.
I wouldn't be surprised to see the S&P 500 reverse from here — short-term highs don't mean squat.
In fact, if you sell short on a new 52-week high, and cover on a 12-day low, you would have won 68% of the time since 1997.
So like I said, new highs don't mean squat in the short-term.
Not that you want to short new highs…there are much better ways, but I hope this message dispels some myths about the market.
Most of what you might have heard is simply regurgitated from old research.
The markets completely changed with the advent of S&P 500 futures in 1982.
The “trendiness” of stocks has been replaced by a market that reverses at extremes most of the time.
You absolutely must know this as a stock trader.
Or you'll just drive yourself crazy watching these reversals — tears of joy one minute, turn into tears of frustration…if you don't get what I'm telling you right now.
Got it? Good.
Trade smart,
Dan