Sunday, October 30, 2011

The Stealth-Dip Hypothesis

The Dow/Gold ratio measures the price of the Dow in terms of how much gold, in Troy ounces, it takes to purchase the Dow. Normally, economists look at this ratio to compare market valuations over large periods of time for which inflation is in play, (e.g. to compare valuations in the 1920's to today.) I have begun to look at the Dow/Gold pricing for a different reason: to get a view of the market that is independent of central bank monetary policy. The thinking here is that quantitative easements have the effect of artificially pushing down the valuation of the dollar, thus, the stock market is exhibiting artificially high prices and is masking the much awaited second dip in the market.

Dow/Gold on 10/29/2011
In the above PairRatio study I plot the dow futures (/YM) divided by gold futures (/GC) (Note: In order to get the plot of the ratio it is necessary to enter the difference between the two futures so I've hidden the main-chart plot and just show the PairRatio study.) I've drawn in the level of the infamous Mar 6, 2009 low of the ratio and as you can see the market dipped that level in August during the S&P downgrade fiasco. However, the market has since touched above the 09 low-level which, so far, is supporting my hypothesis of a stealth 2nd dip.

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