Comparing Lumber (sensitive to housing) and Gold (sensitive to implied stock market volatility) can be predictive of what comes next [for each].
By Michael A. Gayed, CFA (pensionpartners.com/blog/)
The commentary above and below are edited excerpts from the original article* as posted on SeekingAlpha.com which can be read in its entirety HERE.
Take a look below at the price ratio of Lumber ($LUMBER) relative to Gold ($GOLD). As a reminder, a rising price ratio means the numerator/Lumber has been outperforming (up more/down less) the denominator/Gold. A falling ratio means the opposite.
Notice that the Lumber/Gold ratio has been under-performing since mid-June fairly consistently, before the big 3rd quarter decline in broader equities.
As shown in our research:
- when Lumber under-performs Gold (falling ratio), on average, stock market volatility rises historically and
- when Gold outperforms Lumber (rising ratio), volatility has tended to fall and there has, on average, been an upward bias in risk assets.
Clearly the downtrend in the ratio remains intact, but may be due for a bounce implying stock market risks might fade in the autumn and allow for a move higher.
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…For those interested in positioning for a better stock environment, it’s worth watching Gold’s message to stock bears if it begins to under-perform Lumber…
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