Ratio analysis is one of the most valuable tools that we have as market participants. It’s important to recognize where money is flowing out of, and where it is going into. This is the case when it comes to stocks, bonds, commodities and currency markets. A lot of these ratios tell us what the institutional money is doing, which is what drives markets. Think about the long-only mutual fund managers as a giant cruise ship. It takes a long time for a cruise ship to turn completely around and go in a different direction. With the amount of money being controlled by mutual fund managers, it’s a similar situation. We can spot a cruise ship turning around very easily, because it takes so long. It’s not much different in the stock market.
Today we are looking at a ratio of the Consumer Discretionary Sector vs Consumer Staples. The reason this is important is because of the high correlation between this particular ratio and the S&P500.
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