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Explaining Risk Assets vs. Safe-Havens (RAVS)



(sample RAVS curves from 10/11/2011, market close)

RAVS is a simple theory - one can perceive how risk-averse the market is feeling by comparing which types of assets are raising and which are falling.  By having this overview of the market's mood on a given day, we can hone in on areas of day-trading opportunity.

A basket of twelve high-volume ETFs are used to quickly assess what the overall market attitude is towards risk.  The twelve groups, representing most risky to most risk-averse, are Small Cap Equities, Mid-Cap Equities, the Nasdaq, the S&P 500, the Dow Jones Industrial Average, Oil, Broad Commodities, Gold, Short-Term Bonds, Mid-Terms Bonds, Long Term Bonds, and the Dollar Index.

On a perfect bull day for equities, we'd see a smooth line running down the chart from upper left to lower right... equities are showing good strength, and bonds are moving down.  The fact that bonds are moving down shows overall belief in the strength of the equity rally.

On a perfect bear day for equities, we'd see the opposite - an upward sloping line from lower left to upper right, showing that money is flowing out of risky assets and in to safe havens.

Naturally, such perfect lines don't form, but we can still glean some good information about the market's bias, as well as identify other trends that are under way.

My goal is to update these charts three times a day - during the pre-market (9:00am), around mid-day (noon), and at close (4:00pm).  Each chart shows the previous day's close, and as earlier plots are accumulated through the day they are retained as well.

RAVS is intended for day traders - it is based on percentage movements from the previous day's close.  My hope is that it can help day-traders in making decisions on what leveraged ETFs warrant their attention for today, and for today only. 

As an example, if I saw a RAVS curve showing the previous day's close was bearish in equities, and that same curve was reinforced by the 9:00am pre-market curve, I might decide to focus on looking at entry points for SPXU.  The noon curve might show that the previous curve had fully reversed, and now showed money coming out of bonds and into equities.  UPRO might be a better choice for the afternoon. 

Naturally individual symbol prices would have already given me an idea of what was going on without referring to the RAVS curves, but my beliefs could be reinforced or disputed by checking them.  Seems like a rally is happening in the S&P?  If safe havens aren't headed down at the same time, my belief in the rally would be diminished, because apparently the market's mood hadn't adjusted enough to truly support it yet.  Staying on the sidelines until signals became clearer might be advised.

I do hope to be able to present longer period money flow trends in the future.

I'm open to any and all advice on improving the system - better division of the risk-to-safety spectrum, better asset categories, better ETFs to represent them, etc.

The list of current ETFs follows, ordered from risk to safe-haven:

Small Cap - IWM
Mid-Cap - MDY
Nasdaq - QQQ
S&P 500 - SPY
DJIA - DIA
Oil - USO
Broad Commodities - DBC
Gold - GLD
Short Bonds - SHY
Mid Bonds - IEF
Long Bonds - TLT
Dollar Index - UUP