SPY-TLT Spread Deviation Puts These S&P 500 Stocks in Focus

Key Points

• There is a dislocation between the S&P 500 and the bond market today, one that the bigger banks and funds might correct.
• Are the biggest names in the S&P 500 at risk? Analysts and insiders would say so, giving investors a warning sign.
• This bond ETF offers lower risk and potential reward and is also an indicator of dip-buying opportunities.

When investors look at the big players on Wall Street, the hedge funds and the investment banks, they aren’t the so-called winners just because they have information sources that most retail traders would have to network for years to get. They are winners because they can use information through strategies that increase their odds ever so slightly over the long run.

While retail investors don’t have access to all this information, they do have ways to replicate some of the main strategies used in these funds and trading desks at the big banks. One of these is the simple concept of long-short equity, otherwise known as relative value. Relative value is, no pun intended, relatively simple, as asset classes and stocks will eventually converge and diverge to levels that often provide great trading opportunities.

Today, it is the level of the SPDR S&P 500 ETF Trust NYSEARCA: SPY representing the entire stock market relative to the level of the iShares 20+ Year Treasury Bond ETF NASDAQ: TLT, which means the more extended maturity bond market. This is important to know because, at today’s level, the divergence would call for a potential correction in the stock market or a similar breakout rally in bonds. This is what these scenarios could mean for some of the largest names out there.

Are Top S&P 500 Stocks Facing a Potential Pullback Risk?

According to the S&P 500 ETF weightings, two of the most extensive stocks in the index are Apple Inc. NASDAQ: AAPL and NVIDIA Co. NASDAQ: NVDA, where most of the exposure is in the technology sector. Be that as it may, these two names have come into some discouraging news lately, adding importance to the stocks and bonds divergences today.

Warren Buffett has been selling Apple stock for over two quarters, and recent earnings in other computer companies like Dell Technologies Inc. NYSE: DELL have shown investors that the current demand for electronics is on the decline.

Then there are the accusations being placed on NVIDIA as others in the semiconductor industry come into financial scrutiny, such as Super Micro Computer Inc. NASDAQ: SMCI, one of NVIDIA’s largest customers. Whether these two developments pose a risk to the S&P 500 is debatable.

However, considering where the stock market trades relative to bonds today, it does look like the index needs to adjust, which could pose a risk for these two stocks, which are the largest in the index and, therefore, the most exposed to this relationship.

Recently, analysts at Barclays have reiterated their Underweight rating on Apple stock, this time lowering their price targets to only $184 a share, calling for a net downside of as much as 23% from where it trades today. While analysts aren’t brave enough to go against NVIDIA, its CEO Jensen Huang is, as he has been selling stock since June 2024.

Maybe these measures are a precaution against the current stock market levels, but one thing is for sure: there is a big move coming soon, as hedge funds are probably looking at this today.

SPY vs. TLT: Examining the Overextended Relationship and Its Market Implications

This phenomenon doesn’t occur often, but when it does, market forces typically correct the inefficiency quickly. Over the past 12 months, the relative strength index (RSI) between bonds and stocks has signaled the same trend, leading to a stock market pullback.

While the ratio (S&P divided by bond ETF) goes higher, the RSI goes lower in a divergence, which is a technical setup for a textbook correction. That same pattern has been present for a couple of weeks, and now that the stock market has struggled to break higher for the past week, new buyers are waiting for better prices.

This is where the risk to the most prominent names in the S&P (Apple and NVIDIA) comes from. Suppose new buyers are only found once the ratio corrects itself as the RSI calls for. In that case, there will be no momentum to speak of and carry the market higher.

On the other hand, as the iShares 20+ Year Treasury Bond ETF has underperformed in this ratio, investors can safely assume that considering a bond allocation is one way to diversify against a potential pullback risk in stocks, especially now that markets are digesting the potential impacts of trade tariffs and inflation.

Investors can also use this ratio and its RSI indicator to keep track of potential dips that could present an opportunity to buy back into some of their favorite names in the market. These are the things that the professionals look out for and some of the tools that can be adopted to lower some of the potential risks that come from investing in the stock market.