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Technical Monday: How Key Ratios Measure Risk

November 18, 2024

Mish's Daily

By Mish Schneider

I ended last week on Maggie Lake’s podcast.

During the discussion, we covered a lot of topics, and I encourage you to go have a listen as we offer actionable information.

One of the topics we covered is the notion of risk parameters, and how we use ratios to ascertain risk on or off.

Above is a chart from our BigView product.

The four ratio indicators I look at most are

SPY vs TLT - the relationship between the safest debt instrument (U.S. bonds) versus the benchmark stock index, the S&P 500. Stocks historically offer higher returns than bonds, but they are inherently riskier. When the ratio is trending up as it is now, it identifies an increased appetite for risk in the market. Risk on.
HYG vs TLT - the relationship between risky high yield corporate debt (HYG) versus the safety of U.S. Bonds (TLT). When HYG outperforms TLT, as it is now, that shows an increased appetite for risk in fixed-income markets. Risk on
SPY vs GLD - the relationship between the S&P 500 (SPY) and Gold (GLD). Currently, SPY outperforms GLD. That generally identifies an increasing appetite for risk and is viewed as favorable to stocks. Risk on
WOOD vs GLD - The relationship between gold (GLD) and lumber (WOOD). When this ratio is trending up it indicates that the relative performance of lumber is improving versus gold. Economy Improving

With all risk factors in gear, it is hard to get too bearish unless those ratios change.

Another big point of our conversation was on Bitcoin. Essentially, we discussed money management based on current levels in Bitcoin and many of the other currencies.

Viewers often ask me about gold and silver.

Maggie and I discussed the bounce (which began today) and more importantly, how silver behaves relative to gold.

This is yet another key ratio to assess risk and inflation factors.

While both metals are beneath their 50 daily moving averages, momentum turned up today.

However, looking at gold, it underperforms SPY.

Looking at silver, it remains an underperformer to gold at this point (also risk on for equities).

The goal of the podcast with Maggie given the time she generously allows for, is to leave you with actionable indicators that assess the risk dispassionately.

This is especially crucial during this highly emotional time for investors.

Educational purposes only, not official trading advice.

For more detailed trading information about our blended models, tools, and trader education courses, contact Rob Quinn, our Chief Strategy Consultant, to learn more.
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