4 Charts I’m Watching for a Market Turn

• stevenplace
• October 8th, 2009

Everyone screaming overbought in this market has been proven wrong for the past few months. Anytime we get a large move up, the technicals correct through price rather than time. We’re starting to see some technical weakness via trend breaks and moving average crosses, but as seen from the past few weeks’ price action, we’ve moved sideways and strongly made up the ground we lost from the early month selling.

So other than straight equity price action, there’s a couple other charts I’m watching to see if there’s any evidence of a market turn. These charts are based upon what I think are the two predominant and polar opposite macro trades: reflation vs. risk aversion.

If you’ve listened to any of my shows during stocktwits brunch on stocktwits.tv, I generally start off the first half with a discussion about the overall macro picture that includes equities, commodities, bonds, and other related topics.

My overall thesis of the price action from the past 6 months is that it has been liquidity based, keeping in mind the reflation trade. That means, in a nutshell, long equities and commodities, and short treasuries and dollar. That trade has worked phenomenally and until the trend changes it will continue to work.

The opposing market force in terms of the macro picture is the risk-aversion trade. This is where money flows out of more risky assets and back into “safe” bets.

Here are the charts I use to gague investor interest in the risk-aversion trade:

JNK/LQD

This chart is a ratio between the etf for junk bonds and the etf for safer, corporate bonds. We should expect that if the risk aversion trade is to work that junk (high yield) will start to underperform safer bets.

This chart on it’s own has been in an uptrend since March, and every oversold reading has been bid up. I see no evidence of a trend change (yet). You could make the case for a falling wedge pattern, but that analysis is fairly elementary. We had some volatility come in last week as CIT news prompted a strong selloff in JNK, but the oversold reading provided, yet again, a bounce. Until this trend changes I see no evidence of the risk aversion trade.

GLD:USD

This ratio tracks the relative performance of gold (etf) compared to the dollar. The rationale for this is that it isolates gold from just an “inflationary” measure. This is to show how much of the move in gold is related to dollar performance and how much is related to other measures. I believe that running to gold has

GLD:DBC

In my eyes, gold is seen more as risk aversion than a global growth story, although both can have an effect on its price. This chart attempts to isolate gold from the reflation trade as well. The idea is that if gld is trending relative to the other bucket of commodities, there’s other forces there besides reflation.

EEM:SPY

Investors look outside of the US when they are looking at expanded returns and a way to hedge against dollar weakness. This chart looks at the relative performance of emerging market equities relative to domestic to see what sort of performance investors are looking for overseas. The trend is still up, so that means there’s no evidence of the risk aversion trade here.

Do note that these charts are more thematic and should be viewed no closer than a daily timeframe. They help to provide a reference as to where money is flowing. If you have any comments or improvements to these themes, please let me know in the comments section.

Tickers: dbc, eem, gld, jnk, lqd, spy, tlt, uso

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