This is a grid I put together showing different views of risk, or overall market health. I used renko bars for all the charts since really the overall trend is more important than any given day.
- IWM/SPY - When investors are putting risk on, they favor small cap stocks over large cap stocks since better returns can be found there. When they become risk adverse, money exits small caps and flows into large cap stocks, perceived as safer investments. The first chart shows a ratio of the Russell 2000 small cap stock ETF to the S&P 500 large cap ETF.
- SPY/TLT - When savvy investors start fearing a major correction, they start moving money out of stocks and into treasuries, which are as close as you can come to guaranteed returns. With SPY considered among many the best representation of the stock market, the next chart is a ratio of the stock market to 20yr treasury bonds.
- SPY/GLD - Similar to the last chart, gold is another one of those investments for the risk-adverse. It also can serve as a safe-haven for those fearing deflation. This chart is a ratio of stocks to gold.
- NYSE Advance Decline Ratio - the ratio of advancing to declining stocks on a daily basis. This is a time-proven market breadth barometer that generally should remain above 0 in a healthy market.
My takeaway from these charts is neutral bias for now, but exercise caution. The IWM/SPY chart shows that risk is possibly shifting out of small caps and into large cap stocks, but a definitive downtrend is not yet in place. The GLD and TLT ratio charts are similarly off their highs, but not yet showing a clear downtrend. The A/D ratio chart is showing a concerning trend of lower highs over the past year, but is still maintaining above 0.
- IWM/SPY - When investors are putting risk on, they favor small cap stocks over large cap stocks since better returns can be found there. When they become risk adverse, money exits small caps and flows into large cap stocks, perceived as safer investments. The first chart shows a ratio of the Russell 2000 small cap stock ETF to the S&P 500 large cap ETF.
- SPY/TLT - When savvy investors start fearing a major correction, they start moving money out of stocks and into treasuries, which are as close as you can come to guaranteed returns. With SPY considered among many the best representation of the stock market, the next chart is a ratio of the stock market to 20yr treasury bonds.
- SPY/GLD - Similar to the last chart, gold is another one of those investments for the risk-adverse. It also can serve as a safe-haven for those fearing deflation. This chart is a ratio of stocks to gold.
- NYSE Advance Decline Ratio - the ratio of advancing to declining stocks on a daily basis. This is a time-proven market breadth barometer that generally should remain above 0 in a healthy market.
My takeaway from these charts is neutral bias for now, but exercise caution. The IWM/SPY chart shows that risk is possibly shifting out of small caps and into large cap stocks, but a definitive downtrend is not yet in place. The GLD and TLT ratio charts are similarly off their highs, but not yet showing a clear downtrend. The A/D ratio chart is showing a concerning trend of lower highs over the past year, but is still maintaining above 0.
In particular, you should spend no time at all thinking about those rosy scenarios in which the market goes your way, since in those situations, there's nothing more for you to do. - William Eckhardt