got this idea from reading an excerpt from a financial newsletter that
appeared in Barron’s last week. I finally got around to plotting it on a
chart, and surprisingly, it does seem to have some predictive power,
especially on a longer term basis of around 6 to 9 months out. However, the sharpness of the angle drop suggests that the market may turn down sooner than 9 months….this is a very sharp drop indeed!
idea is that during inflationary times, commodities will out-perform
and the economy will tend to falter. During disinflationary times (like
the past several years), the retail sector will out-perform the
In my ratio chart, the retail sector is represented
by the XLY, which is the Consumer Discretionary Sector. For the
commodity representation, I chose the XLE (Energy) because the
newsletter says that Energy investments are the ultimate commodity play
to measure against.
In the Ratio chart, when the ratio is rising
(represented by OHLC bars and tracking a 10 week moving average line),
then it is assumed the economy is expanding at a normal basis and profit
margins are rising. When the Ratio is falling, it assumes that possible
inflation is entering the picture and eroding profits.
the Ratio went into free-fall this past few months….in fact, the drop
is hard and sudden, and yet the $SPX seems to have barely been
shaken….if this holds up like the past, then we should see a major
change of direction within the next few to several months and it suggests that the 5 year bull market may be coming to an end.
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