In this article the author focuses on the ratio between lumber and gold. Stating that will the ratio falling this signals that continued tough time are in the conventional markets future.
Click here to visit the original posting page over at MarketWatch.
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“Don’t cry because it’s over. Smile because it happened.” – Dr. Seuss
Markets are going lower! The bottom is in! Stocks are going higher! Buy! BUY! Wait! They are going to re-test the lows!
Seriously, folks, this is no way to manage your mental health, let alone the health of your portfolio. Emotions should never ever come into play when it comes to making decisions related to your money. While it makes for great headlines and discussion, the harsh reality is that most market movement day to day is noise.
Indeed that noise and volatility is precisely why so many are unable to generate long-term wealth in stocks. Always remember that your ability to stick to a strategy matters more than the strategy itself. If you find yourself reacting off of day-to-day movement, you’re much better off turning the TV off and reading a good book.
Stop looking at the pixels, and instead look at the total screen. The Summer Correction in stocks, which I argued was likely over a month ago, remains very much in play. One of the reasons I argued that the odds favored a big decline relates to our latest award-winning paper titled “Lumber: Worth Its Weight in Gold” (click here to download).
In that paper, we document the idea that when lumber outperforms gold, stocks tend to do well afterward. When gold outperforms lumber, volatility tends to rise and big drawdowns tend to occur afterward. Why?
Because lumber is closely tied to housing (key to growth and inflation expectations), while gold is historically a safe-haven asset which reacts to implied stock market volatility. The strength of the indicator isn’t really in lumber doing well, but rather the signal gold gives. Defense unequivocally over long cycles matters more than chasing and offense. I have advocated this aggressively in the small sample of the last couple of years. Markets are being reminded of this now.
Risk must be managed pre, not post in equities no matter how much movement up or down the S&P 500 SPY, -1.77% has. So with that said, is the Summer Correction of 2015 over? Unlikely.
Take a look below at the price ratio of lumber relative to the SPDR Gold Trust ETF GLD, +0.37% As a reminder, a rising price ratio means the numerator/lumber is outperforming (up more/down less) the denominator/GLD. A falling ratio means the opposite.
Quite simply, the downtrend here suggests that much more pain may come for equities in the near term. So, stop focusing on the day-to-day moves. Stop trying to chase. Focus first and foremost on probabilities and proven leading indicators. Focus on the signal and not the noise.
Admittedly this is quite difficult in a world of constant information flow. Our investment strategies remain quite defensive based not on opinion, but on quantitative indicators. Magnitude matters more than frequency. Gold continues to warn that this is not yet over.
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.