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RATIO ANALYSIS
Ratio analysis allows us to identify extreme market conditions. Since
most "turning points" occur when market conditions become
extreme, ratio analysis can be rather useful in alerting us that a
turning point may be near, and/or to confirm conclusions derived
from employing other technical methodologies such as cycles
analysis, price pattern analysis, etc. The ratios discussed in this
article are some of the ones we look at on a regular basis.
1) BPOEX:VXO Since 2004, readings between 7 and 8.5 have
marked "tops" and readings between 3.5 and 2.5 have marked "bottoms."
2) BPSPX:VIX Since 2004, readings between 7 and 8 have
marked "tops" and readings between 3.5 and 2.5 have marked "bottoms."
3) CRB:OIL Since 2000, "spikings" have marked
all important "tops" and "bottoms in the price of oil.
4) DJIA:OIL Since 2000, "spikings" have marked
all important "tops" and "bottoms in the price of oil, and in the
DJIA.
5) GOLD:HUI Since 2004, readings between 2.25 and 2.5 have
marked "bottoms" and readings below 1.0 have marked "tops."
6) GOLD:XAU Since 2002, readings between 5.0 and 5.5 have
marked "bottoms" and readings below 3.8 have marked "tops."
7) NDX:IBB Since 2002, readings between 22.5 and 23.5 have
marked "bottoms" and readings below 20 have marked "tops" for
biotech.
8) SPX:OIH Since 2006, readings between 10.5 and 11.0 have
marked "bottoms" and readings below 10 have marked "tops" for the
Oil Service sector.
9) SPX:XLE Since 2006, readings between 25 and 26 have
marked "bottoms" and readings below 23 have marked "tops" for
Big Oil.
10) SPX:QQQQ Since 2003, readings between 31 and 30 have
marked "tops" and readings above 32.5 have marked "bottoms" for
the QQQQ.
Currently, all ratios are near the middle of their most recent range,
implying that the markets in question are neither at a bottom,
nor, at a top, and thus, there is no compelling reason to be fully long,
or, fully short.
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