Weird SPY, TLT, LQD/HYG Correlations: Technical Update

Here's a quick technical update on the SPDR S&P 500 ETF ($SPY) with weekly correlation analysis. First, you can see that SPY looks vulnerable again in its rising wedge. SPY could break down at any moment. LQD/HYG has also been trending higher since the beginning of 2014, which isn't exactly a bullish sign for other risky assets like stocks.

Correlations are also saying that something is not right with the stock market. SPY is correlating negatively with HYG and correlating positively with LQD/HYG and TLT. This doesn't make much sense because stocks usually rise when credit risk is declining and when Treasuries are out of favor. Since the market peaked in 2007, SPY has never had a positive correlation with LQD/HYG (over 20 weeks). And the only other times SPY and TLT had high positive correlations were at the end of 2006 and throughout 2009, which were major turning points in the stock market (the chart below is weekly). So I think the next major stock market correction is near because of these bearish relationships.


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