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What Ratio Analysis Can Tell Us About Today's Market

Mar. 03, 2020 6:37 PM ETGLD, IYT, SLV, XLI, XLP, XLU, XLY4 Comments
Harrison Schwartz profile picture
Harrison Schwartz


  • Price ratio indicators cut out market noise and can be used to indicate underlying economic trends.
  • By dividing the price of consumer discretionary stocks by consumer staples stocks, you can generate a leading market indicator that highlights consumer spending trends.
  • By dividing industrial stock prices by utility stock prices, you can get a leading manufacturing growth indicator.
  • Overall, these indicators suggest we may be headed for a longer bear market.
  • Looking for a helping hand in the market? Members of Core-Satellite Dossier get exclusive ideas and guidance to navigate any climate. Get started today »

If you're a reader of my articles, you may know that I employ ratio analysis as a cornerstone tool for my technical framework. I believe price ratios are extremely useful in assessing underlying market trends as a means of filtering out the noise and finding the truth.

Simply by dividing the total returns of one asset by a related asset, we can remove this noise. One well-known price ratio is the gold-to-silver ratio which tells us about the relative performance of gold compared to that of silver. By dividing the two, the noise relating to "precious metals" as a group is removed, and we get a more clear technical signal.

This is illustrated below:

As you can see, these two charts are nearly the same, and we cannot clearly see which metal will be favored by the market. However, by dividing the two, we can see that a clear linear trend in favor of gold that is now making a double top:

While GLD has had a nearly linear outperformance pattern to SLV, that does not mean it will continue. In fact, it may mean the opposite. As you can see, the ratio recently surpassed its past peak and is making an exponential move higher much like a "blow-off-top" pattern. This may mean more outperformance of gold in the short-run, but in the long-run, it usually is a sign of a peak marked by capitulation by some investors (in this case, silver investors).

There is a mathematical reason why this method is so useful. Let's say:

  • (percent change of gold) = percent change of precious metals + unique percent change in gold.
  • (percent change of silver) = percent change of precious metals + unique percent change in silver.

Further, some simple calculus tells us

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This article was written by

Harrison Schwartz profile picture
Harrison is a financial analyst who has been writing on Seeking Alpha since 2018 and has closely followed the market for over a decade. He has professional experience in the private equity, real estate, and economic research industry. Harrison also has an academic background in financial econometrics, economic forecasting, and global monetary economics.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (4)

Augustus profile picture
The information delivered from an examination of the ratios has been showing problem within the stock market for months and years. However the big index, SPY - has continued to soar. This recent downtrend of about 10% is really not much of a response to what those indicators suggest. I suppose the explanation is TINA from the extraordinary money printing and low interest rates.
Dan Victor, CFA profile picture
this deserved an Editor's Pick!
thanks, much to think about
With the money flow going into XLU looking for yield , artificially increasing the top performers aka NEE . The division compared with XLI with the fear of a global slowdown, it makes no sense.
XLU will have a day of reckoning when they have earnings nat gas is so low it makes the monthly fuel charges much less . Revenues are down for lower monthly bills are all across the country. Meanwhile cost plans are through the roof with spending on solar farms.
SLV has totally been driven by options placement. GLD has been a true flight to safety and a hedge to treasury purchases by our foreign banks. As well as the dollar . I would love to see your work with a ratio of GLD to dollar to treasury purchases by week.
I love the idea of ratios however it would seem to make the most sense if you threw out skew drivers like Amazon for XLY
And threw out PG from XLP . I Believe if you throw out the top 5 from each you may have a truer correlation to use.
The ETF flows to the top 5 making the entire math skewed.
I used to work in the grocery industry. We would have to throw out the bottom 5 and top 5 stores to find a true gauge for many things from labor needs to P&L comparisons. As we grew that number had to change to find a happy medians.
Just another opinion.
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