"Everyone has a plan 'till they get punched in the mouth" - Mike Tyson

March 18, 2013

Searching for clues

I'm evaluating a new tool for future use and wanted to share some thoughts.    

This tool is a growth to value ratio using S&P indices.  Right off the bat, we can see this ratio generally trends the opposite direction of the S&P 500.  

Why has this ratio moved inversely to the market??  At first blush I thought this ratio would fall during market pull backs as growth names often have higher beta.  I guess that train of thought is too simplistic.  Well...  

We can say with confidence the very best stocks and stories in the market are growth names.  I think it's fair to say managers would want to hold those stocks on the way down while dumping the names with less going for them(aka value).

Right now the ratio has been falling from a major double top with fury as the rally keeps truckin'.  We see throughout the chart extreme differences between the two lines often mean revert.  

Currently, there is a one of these stretched differentials.  The RSI divergence sets up a large reversal which may coincide with a pullback in the S&P 500.  Take a look at early 2011.  The divergence built and finally sharply reversed higher.  It preceded a major top in the indices.  So far, this is somewhat comparable to the current action.

In the early 12' top, this served as a leading indicator of a weakening primary rally.  With the other smaller tops, we really get nothing of use.     

As we back this out the chart we see the upper boundary has acted a significant bottom signal.  The lower boundary is gives us very little practical use but the most recent touch acted as a significant top in the market.


Overall, this tool, as presented is something I'll look at once every month or so.  It isn't a perfect indicator, but we have a couple of decent uses for it and it seems to be a solid secondary piece of evidence.

If you think I missed something, give me a shout and we can discuss this further.  You can comment or tweet me @aro618 on twitter/stocktwits


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All ideas shown on this blog represent the authors opinion based on the data available.