Trading with Intermarket Analysis

CHAPTER 6

Asset Allocation Rotations Leading to 2007 Top

This chapter shows how the use of the relative strength ratio can be used to spot changes in leadership between asset classes, which is necessary in making asset allocation choices. A major asset allocation shift took place from paper assets to hard assets during 2002. The bond/stock ratio tracked important changes in leadership between those two competing assets during 2000, 2003, 2007, and 2009. Rotations in 2007 followed the intermarket script very closely. Stocks and the dollar fell while gold and Treasuries rallied. Bonds, stocks, and commodities peaked in the proper order during 2007 and 2008. The 2007–2008 stock bear market was global. Global stocks become even more closely correlated during downtrends.

■ Relative Strength between Asset Classes

The previous chapter used the Dow Industrial/gold ratio to compare the relative performance of gold and the stock market. This chapter will expand that analysis by using ratio charts to compare the relative strength between bonds, stocks, and commodities to show which of the three asset classes are doing better at any one time. The idea is to concentrate one’s capital in the assets that are doing better and to avoid (or underweight) the ones that are doing the worst. Fortunately, ratio charts make it relatively easy to compare the strength or weakness of the three asset classes.

JOHN’S TIPS

Chart programs make it very easy to plot ratio charts.

Ratio charts can help warn of ...