Thursday, March 1, 2012

A handy ratio chart

This is a ratio chart of the S&P Retail Index ETF divided by the Consumer Staples Select Sector ETF:

(click for larger image)

I've superimposed the S&P 500 Index (pink) on the ratio and I've highlighted three instances (blue arrows/brown dashed lines) since 2007 where the comparison of the ratio and the S&P gave us timely signals on imminent monumental moves in the S&P.

The first instance was in the June-August 2007 time frame when the ratio gave us a negative divergence.  In other words, the ratio declined but the S&P continued higher, for a time.  By October however, the S&P commenced its catastrophic decline into the Great Financial crisis and the March 2009 bottom.

The second instance took place in and around the 2009 low when the ratio started to turn up in December 2008 predicting the "V" bottom of early March 2009.

Finally, we can see another divergence in the August - October 2011 time period when the ratio turned up two months prior to the S&P.

Like all indicators technical analysts use nothing works 100% of the time. However, as we can see, this one is three for three during the most volatile period in the market's history since the Great
Depression.  It's worth keeping an eye on.