Bonds are outperforming stocks as money flows into relative safety and shuns risk. Overall, relative strength in bonds reflects risk aversion in the financial markets. Relative strength in bonds also indicates that investors should prefer bonds over stocks right now. Like all market dynamics, it is subject to change, but current trends favor bonds until there is evidence to the contrary.
I am using the Aggregate Bond ETF (AGG) to represent the "bond" market and the Equal-Weight S&P 500 ETF (RSP) for the stock market benchmark. The chart shows AGG firming in the 107.5 area in June and breaking out in July. AGG extended its gains into August and established support in the 108.5-108.75 area. The ETF caught another bid this week with a bounce and this further affirms the support zone. The trend here is clearly up as long as support at 108.5 holds.
Click this image for a live chart
The middle window shows RSP and the lower window shows the AGG:RSP ratio. Notice that AGG broke out as RSP broke down in July. This indicates that money moved out of stocks and into bonds at pretty much the same time. Chartists can also compare the performance of bonds versus stocks using a ratio plot (AGG:RSP). This ratio rises when AGG outperforms RSP and falls when AGG underperforms RSP. Notice how this ratio surged in August as relative strength in AGG accelerated. Clearly, the financial markets prefer the safety of bonds right now. The next chart shows the 7-10 YR T-Bond ETF (IEF) with similar relative strength and the image underneath shows how to create a ratio chart.
Click this image for a live chart
Click this image for a live chart
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