The broad Value Line Geometric Index is a good way to monitor the progress of the average stock. Given the index made a stand near similar levels in 2011, 2016, and 2018 (green arrows), the upward-sloping blue line represents an area of possible support. The expression what once acted as major resistance may now act as major support applies to the horizontal blue line where the index was rejected in 1998, 2007, and 2015 (red arrows).
If the stock market is about to push higher, we would expect growth-oriented investments to outperform defensive investments, such as bonds. The ratio of stocks-to-bonds is also near a key area from a very long-term perspective. The ratio was rejected on a rally attempt in 2001 and was unable to clear the same area in 2007. The ratio stalled near the same blue horizontal line in 2017 before breaking out. Therefore, it is possible the blue horizontal line that acted as resistance for eighteen years may now act as support. We also have reason to believe stocks could make a stand soon relative to bonds based on the prior areas of support in 2009, 2012, and 2016 (green arrows).
The chart on the left below shows the stock market is trying to move away from levels that have been relevant for twenty-one years. The stock-bond ratio is trying to move away from levels that have been relevant for eighteen years (right side).
Bank of America recently issued a report that points to the increasing possibility the role of bonds in a diversified portfolio may change significantly in the years ahead. From MarketWatch:
In a research note published by Bank of America Securities titled “The End of 60/40,” portfolio strategists Derek Harris and Jared Woodard argue that “there are good reasons to reconsider the role of bonds in your portfolio,” and to allocate a greater share toward equities.
The conclusions drawn in “The End of 60/40” align with a bullish breakout in the stock-bond ratio. What could drive such a significant shift? History says one major driver will most likely be demographics. This week’s CCM stock market video takes a detailed look at the factors that create major economic and financial market trends, concepts that may prove to be incredibly helpful to investors over the next five to fifteen years.
The S&P 500 closed at 3025 on July 26. Given the market was trading at 3005 during Monday’s session, the bulls still have hurdles to clear. The ratio of consumer staples to the S&P 500 reversed near similar levels in 2016 and 2018 (red arrows); the S&P 500’s performance (bottom) tells us to remain open to a break to the upside for stocks in the coming days and weeks.
This post is written for clients of Ciovacco Capital Management and describes our approach in generic terms. It is provided to assist clients with basic concepts, rather than specific strategies or levels. The same terms of use disclaimers used in our weekly videos apply to all Short Takes posts and tweets on the CCM Twitter Feed, including the text and images above.
