ratio’s are really powerful

been blogging a BUNCH about the importance of the XLP / SPY ratio.  Why?  Well, EVERY turn since 2000 has been nearly exact to the ratio turning up or turning down.  here’s the chart:

XLP / SPY ratio w/ S&P overlaid on top of it ... NOTE divergence since 2012
XLP / SPY ratio w/ S&P overlaid on top of it … NOTE divergence since 2012

folks, it doesn’t get much better than that … the CANDLES is the ratio of XLP / SPY.  The BLUE LINE is the S&P 500.  the chart time frame is monthly.  EVERY PIVOT IN THE STOCK MARKET HAS BEEN A CORRESPONDING PIVOT EQUAL/OPPOSITE in the ratio. (move up in stocks equals move down in ratio and vice versa)

why is this important … well, check out the VIX and the ratio

XLP / SK&P w/ VIX overlaid on top of it
XLP / SK&P w/ VIX overlaid on top of it

here’s the deal — RATIO ANALYSIS is a unique look into the key hole of the INSTITUTIONAL rotation … and, my take is the ratio should have been sreamcing down while the S&P ripped to new highs.  IT DID NOT … that has been something I have tried to resolve for almost two years …

now, why is this low so important in the ratio?  well, take a peak at the RSI BULLISH support zone below:

XLP/SPY ratio found support on bullish RSI zone
XLP/SPY ratio found support on bullish RSI zone

and, then you could have this as your count …

a POTENTIAL count for the XLP / S&P which shows higher
a POTENTIAL count for the XLP / S&P which shows higher

so, let’s review:

  • the CHARTS show
    • when the XLP/S&P 500 ratio pivots so does the market …
    • we had a very noticeable divergence in the ratio and the S&P 500 as the S&P 500 screamed to new highs
    • we have shown that the VIX pivots w/ the ratio
    • we have shown the ratio is at bullish RSI support zone …

all the above tells me 1) volatility is here to stay, 2) expect pressure on the equities and 3) I could and might be completely wrong and that’s OK!

make it a great weekend and rock on, ok?

Bart

Using ratio’s for relative strength comparison

If the Numerator is bigger than the Denominator then the ratio goes UP.  If vice versa, the ratio goes down.  If we put one security over another then we can plot the relative strength and note when a shift in this relative strength takes place.  This shift can show rotation. What you’ll find is the XLP/$SPX ratio EXACTLY nailed all the highs and lows since 2000.  Yes, the high in 2000 was accompanied by an inflection in the ratio … what is of interest now is the ratio has not made a new low while the S&P makes new highs. This divergence is important …

XLP/SPX showing a buy after a typical a-b-c correction
XLP/SPX showing a buy after a typical a-b-c correction

 

here’s a long term monthly of the ratio posted on this blog in/around November.  2014 has shown a divergence that has not occurred since the XLP came on line.  The divergence is a “new high” in the S&P while the ratio has NOT made a new low.  Monitor …

long term chart showing tops and bottoms since 2000 have corresponded in the XLP/SPX ratio inflectin
long term chart showing tops and bottoms since 2000 have corresponded in the XLP/SPX ratio inflection

 

lastly, I like to use a “real world” or “main street USA” stock to monitor w/ the ratio analysis … WMT/SPX has also been extremely helpful in topping or bottoming at major inflection points.  Suprisingly, this ratio has not made new lows either.  In the classic technical analysis realm – looks like a double bottom forming.

WMT/SPX ratio
WMT/SPX ratio

monitoring this ratio closely …

CLIFF NOTES: sector rotation is a fact of life …we’ve shown how the institutions follow a well defined script and how, usually, energy is the last shoe to drop before the inevitable correction (it’s different this time) occurs.  ratio’s are important because they show relative strength of something versus something.  In this case, we have the XLP (consumer staples) over the broader S&P 500.  The thesis – in times of volatility/risk off – there is a move to consumer staples and the consumer staples become stronger …the NUMERATOR (XLP) is stronger than the denominator (S&P 500).

CLIFF NOTES 2: the line below is the S&P 500 and at EVERY top since 2000 (labeled w/ a blue rectangle and the word “top”) the ratio bottomed.  What’s interesting is the new highs in the S&P 500 were not confirmed by lower lows in the ratio.  That’s something to monitor and watch….note, we do have a MONTHLY signal reversal candle present so, monitor this ratio closely ….

XLP / SPX is candles and line is S&P 500
XLP / SPX is candles and line is S&P 500

Main20140504100359

important ratios – revisited

For those who have been following me since I started this summer, you’ll find I spend considerable amount of time analyzing the RELATIVE STRENGTH of the STAPLES vs the S&P.  Why?  The theory is that, in times of volatility and/or bearishness the “big guys” (read: institutions) will rotate into a defensive posture such as staples.  We need “staples” to live … water bottles, food stuffs, toilet paper, toothpaste, etc.  This does not mean that they won’t go down it simply means they are stronger from a relative strength basis.  If the ratios is GOING UP then volatility and bearishness is taking place … if the ratio is going DOWN then “good times” are here and, generally speaking, it’s BULLISH.  Where I take it to another level is in the pattern recognition … by using advanced pattern recognition techniques across the entire circle of life I try to develop a thesis and then deploy capital in the most risk adjusted manner …

here’s a list of some of the staples work:

http://bartscharts.com//?s=staples

  • the week of October 07, 2013 we have an AMAZING BUY of the ratio that was precise in both PRICE and TIME.  It hit, the market sold off but it was subsequently taken out and the PATTERN FAILED.  End result: BULLISH for the stock market.
  • it was also noted, that the .02 level was a potential target.  at the beginning of the new year this target was hit and, while it held intraday it has been subsequently been defeated.  In my mind, I try to stay away from intraday spike highs or spike lows …however, if we get a weekly close below a pattern level THEN, probability says it’s a failed pattern. Take a look at the below chart … we have a weekly close below.  End result: BULLISH for the stock market.
  • so … while we aren’t too far below the level depicted (1.27 and .786 overlap – usually strong support) I can tell you we need to get back up above and close above on a daily basis that level OR this S&P move could continue.
  • also, I put my trust weekly 14 period RSI in to check out the “zones” for it’s support or resistance … I went back as far as my data would allow and I can tell you that 1) we have bullish divergence on the DAILY chart and on the weekly this is the lowest the RSI has ever been.
note, do we have two patterns failing on the important XLP/SPX ratio?
note, do we have two patterns failing on the important XLP/SPX ratio?

 

note at major turns, the ratio gives a good idea of inflections ... it needs to turn up (xlp/spx) for the bearish case
note at major turns, the ratio gives a good idea of inflections … it needs to turn up (xlp/spx) for the bearish case

the other ratio we have looked at is the Walmart Greeter ratio … same thought process, except this is a single stock.  The “whole world” loves WMT so if the volatility comes back, THEN, the “big boys” will rotate to that defensive hallmark of Walmartians.  Guess what, it completed it’s pattern TODAY and, should go any lower …if the bear case is to be credible w/ our ratio’s.  Here’s the last post on the Walmartians:

the WMT greeter and inflection points

Walmartians relative strength vs the SPX
Walmartians relative strength vs the SPX

 

pattern complete
pattern complete

 

PUNCH LINE: these patterns are complete.  for the bears to have a chance, they SHOULD NOT fail …..

relative strength of staples vs the S&P importance

in order to get up to speed, if you have not been following, please see the following post:

http://bartscharts.com/2013/10/07/staples-strength-vs-the-sp/

we completed a perfect price/time pattern BUY on the ratio and it did, in fact, respect the pattern level.  HOWEVER, since then we have taken out the lows of that pattern and if we go back you’ll see that the .786 was ‘still a target.’  the importance of this ratio cannot be overstated – at every major inflection point since 2000 (I don’t have data that goes back any farther) it has pointed to all of the tops and bottoms of the market.  perhaps we’ll go down and tag the .786 … what I can say, is if we blow thru the .786 then it will show a lack of institutional fear in this market as the thesis is the staples start to out perform as rotation occurs in a volatile or bearish market.  so far, this ratio has been stagnant and correcting for a very long time … let’s stay tuned and see what a little lower does for our ratio.

additionally, I have included the WMT gauge.  please see these posts to get a feel for the importance of this ratio:

http://bartscharts.com/2013/10/25/stay-tuned-the-buy-on-wmtsp-is-complete-or-perhaps-a-little-lower/

XLP/SPX - looks like lower target to get tagged ...
XLP/SPX – looks like lower target to get tagged …
WMT/SPX - little lower ...
WMT/SPX – little lower …

Part V and “I Can’t Quit You Baby”

this was Part IV a couple months ago:

http://bartscharts.com/2013/09/16/part-v-sp-and-sector-rotation/

http://www.youtube.com/watch?v=5g5Ypz74jQw

I think this ratio is one of the most important out there as it shows the rotation into the staples of life, so to speak.  additionally, at EVERY major inflection point since 2000 when this ratio bottoms or tops the market does the opposite.  this pattern is complete, it held and I think it will prove to be very bearish for the market.

I can’t quit you XLP/SPX ratio …

November 10 2013 XLP SPX ratio

Staples Strength vs the S&P

if you wan to catch up I recommend reading the following two posts:

http://bartscharts.com/2013/09/22/the-upcoming-week-of-922-for-the-sp/

http://bartscharts.com/2013/09/25/the-ratio-of-staples-to-the-sp-xlp-spx-trust-me-its-important/

this AM, our pattern that we have been following has completed.  what does that mean?  the pattern either works or it doesn’t … if it works then our thesis is that the staples (as a sector of the overall market)  will start to outperform on a relative strength basis (no not the oscillator) the general market.  when this has occurred in the past, it has very nicely timed inflections points to the down side in the market ….

October 07 2013 XLP - SPX ratio Occtober 07 2013 XLP - SPX comparison

Long term monthly w/ bullish stair steps present
Long term monthly w/ bullish stair steps present

stay tuned … the symmetry of the BUY pattern in PRICE and TIME is very powerful that this level should hold.