October 5, 2009

S&P 500 vs Japanese ETF Priced in Gold

Last week’s sell off in equities is being lauded as yet another opportunity to buy into the dip – but is this thought universal?

The daily chart above is a ratio plot of the SPDR S&P 500 ETF (SPY, top window) and the iShares MSCI Japan Index EFT (EWJ, bottom window), each divided by the SPDR Gold Trust ETF. The ratios serve as a proxy for pricing each index in gold rather than US Dollars. Blue dashed vertical lines mark pivots of interest for each market priced in gold from 11 Sep 08. Lastly, a blue major and black minor trend line is plotted for each index.

There’s no denying investors have enjoyed a significant recovery in global equities in 2009. While there have been dips along the way, each leap into the market has been rewarded with continued long side investment appreciation. Determined shorts, either new to market or still holding from longer time horizons, have continued to be caught off guard by the advance. Arguments can be made on both sides regarding the recovery, ranging from short covering adding fuel to the advance, to unbearably low yields on short-term treasuries motivating a flight to equities.

The question remains, in what is unquestionably a strong advance, are we over extended? While most global markets bottomed in late 2008, the S&P 500 did not complete its sell off until spring 09. Priced in terms of gold, however, Japanese markets led their American counterpart in the advance by some two weeks. When the S&P ratio drifted from May 09 – Jun 09, the Japanese ratio moved quietly higher. When both markets got in gear again in Jul 09, each advance succumbed to a break below their respective longer-term trend line (in blue) going into Sep 09.

What’s different now? Notice that the Japanese ratio has not only broken its intermediate term trend line (in black), it has also traded back toward, and failed to recover above, that point of resistance. This instance of polarity warrants pause. Technicians watching the S&P 500 in isolation would be wise to open their horizons and look to the performance of global equities no matter how much greater their relative advance. Indeed, should the S&P priced in gold break below its intermediate trend line (in black), investors should research protective measures which offer insurance against giving back capital that was hard earned during this cyclical recovery.

Jeffery E. Lay, CMT
President
Talon Eight, LLC

Disclaimer: This post is intended solely to disseminate information, and is not, and shall not be construed to constitute financial, investment or other similar advice. All posted material should be independently verified for accuracy and current applicability. Readers of this post are referred to the Risk Disclosure for further information.

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