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Today's WrapUp by Ike Iossif 11.22.2005  Mon   Tue   Wed   Thu   Fri   Archive

RATIO ANALYSIS

One of our favorite types of analysis is ratio analysis because it tends to reveal when the historical numerical  ratio between correlated markets/sectors is at extreme points, and thus, ripe for reversal.

We like to buy gold stocks when the gold/XAU ratio is above 5.00, and sell when the ratio dips below 3.75. We are a long way from an entry point now. Moreover, as the ratio gets closer to 4, we ought to see a minor reaction, but we don't expect to see a top until the ratio gets closer to 3.5-3.25.

Another ratio that we follow closely is the one between the XAU and TLT. Notice in the previous instance we did not get a sharp counter-trend move in the XAU until the ratio exceeded 1.40.

Investors need to pay attention to the direction of interest rates versus the price of gold/gold stocks. Notice that the XAU began to rally from the 105 level as the TLT bottomed around the 88 level. The lesson here is that interest rates have risen to a level that do impact the price of gold/gold stocks, and sooner or later something will have to give. We believe that bonds will end up having to give. We will see higher interest rates and higher gold prices because the "inflation horse" is out of the barn!

Notice that an SPX/BKX ratio below 12.5 is still near its all time low. The implication is that the banking sector remains grossly overvalued. In the face of higher interest rates, investors appear to have misplaced their hopes.

The 30-Yr Bond/BKX ratio appears to be telling us that the banking sector is still in the process of making a long term top, while interest rates are making a long term low.

The QQQQ/QQV ratio is telling us that the QQQQ is near a top.

The SPX/VIX ratio is telling us that the SPX is near a top.

The OEX/VXO ratio is telling that the OEX is near a top.

The NDX/VXN ratio is telling that the NDX is near a top.

Summary

The ratio analysis is telling us that more likely, we ought to expect an intermediate term top in equity prices sometime within the next 2-5 weeks, a counter-trend move in the XAU in the 122-124 zone, to be followed by another rally above 130-135 within the next 4-6 weeks.

Last but not least, we would like to make one more comment about oil. Notice that it has "dug in" the $57-$56 zone. If it continues to hold for the next 2-3 trading days, we would expect a break above resistance at $60, and a subsequent rise above $80. Our top three stocks in the oil complex would be: MRO, OXY, and UPL. For more on oil please visit: http://www.streetiq.com/profile.shtml#MARKETVIEWS

Ike Iossif

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