One Ratio to Rule Them All: WOOD/GOLD
"One ratio to bring them all and in the darkness bind them"
The ratio of Lumber to Gold is arguably one of the most important ratios in the market. Of the 20 or so ratios I keep tabs. This ratio contains a plethora of useful information. It dictates many funds investment decisions, functions as an input in Algos and is a great indicator of the markets progression through Appreciation/Depreciation cycles. It provides valuable information on economic growth, consumer spending and inflation expectations. Lumber is sensitive to housing and domestic economic growth. Housing is usually the bulk of an Americans capital expenditure because, buying a house is inherently risky due, to the leverage component. Most Americans are in the housing market not the stock market. Housing has always been the best leading indicator. Gold on the other hand is ubiquitously popular in periods of high volatility and a defensive play. This ratio tells you when to ‘apply more gas’ or ‘take your foot off the pedal’.
Whenever, this ratio has been bullish, Lumber > Gold. I have allocated a larger percent of my portfolio into small-caps. Hiding out in small caps when you see a sustained uptrend in Lumber/Gold is a simple trading strategy. Higher Lumber prices signals consumer wealth which goes hand in hand with small caps which are sensitive to the domestic economy and the spending habits of consumers. Even as rates have risen, Lumber has not faltered. Mortgage rates have a huge affect on housing prices. As rates rise, loans get more expensive and less money can be offered for houses. Americans are known to make speculative plays with their houses. Refinancing, floating rate mortgages and home equity loans are ubiquitous leading to a very fragile market. Americans view their house as a piggybank. This works until housing prices fall.
The ratio is approaching a very critical level where it will now experience overhead resistance. I don’t believe WOOD has enough strength to pass through these resistance levels without fluctuating periods of consolidation and retests of supply zones. However, I would not be surprised if WOOD has the legs to continue chugging upward. It would be quite the asset bubble. Seeing this ratio peaking at levels not seen since 2005 has signaled to me that I should start looking to take risk off the table and shy away from investments related to IWM. The signal I am looking for is a weakness in WOOD and strength in GOLD. Gold and GDX is looking quite bullish right now at a potential supply level but, I have my doubts still.
The ratio of Lumber to Gold is arguably one of the most important ratios in the market. Of the 20 or so ratios I keep tabs. This ratio contains a plethora of useful information. It dictates many funds investment decisions, functions as an input in Algos and is a great indicator of the markets progression through Appreciation/Depreciation cycles. It provides valuable information on economic growth, consumer spending and inflation expectations. Lumber is sensitive to housing and domestic economic growth. Housing is usually the bulk of an Americans capital expenditure because, buying a house is inherently risky due, to the leverage component. Most Americans are in the housing market not the stock market. Housing has always been the best leading indicator. Gold on the other hand is ubiquitously popular in periods of high volatility and a defensive play. This ratio tells you when to ‘apply more gas’ or ‘take your foot off the pedal’.
Whenever, this ratio has been bullish, Lumber > Gold. I have allocated a larger percent of my portfolio into small-caps. Hiding out in small caps when you see a sustained uptrend in Lumber/Gold is a simple trading strategy. Higher Lumber prices signals consumer wealth which goes hand in hand with small caps which are sensitive to the domestic economy and the spending habits of consumers. Even as rates have risen, Lumber has not faltered. Mortgage rates have a huge affect on housing prices. As rates rise, loans get more expensive and less money can be offered for houses. Americans are known to make speculative plays with their houses. Refinancing, floating rate mortgages and home equity loans are ubiquitous leading to a very fragile market. Americans view their house as a piggybank. This works until housing prices fall.
The ratio is approaching a very critical level where it will now experience overhead resistance. I don’t believe WOOD has enough strength to pass through these resistance levels without fluctuating periods of consolidation and retests of supply zones. However, I would not be surprised if WOOD has the legs to continue chugging upward. It would be quite the asset bubble. Seeing this ratio peaking at levels not seen since 2005 has signaled to me that I should start looking to take risk off the table and shy away from investments related to IWM. The signal I am looking for is a weakness in WOOD and strength in GOLD. Gold and GDX is looking quite bullish right now at a potential supply level but, I have my doubts still.
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Note: When this ratio trends up so do markets...
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