Relative markets

At Tricio we use charts in order to look for insight into market sentiment and investor behaviour. At times this involves looking at ratios and also adjusting markets to a hard currency, in order to see what is really going on.

Years ago I worked with a firm that liked to look at the DJIA in gold terms as a way of trying to look at extreme sentiment in one or the other. The chart below shows the S&P 500 (lower window, semi-log scale, a much better measure of the US stock market than the DJIA) and the S&P 500 in gold terms (top window, red line). 

Gold prices have been setting the financial world on fire over the last few years as they continue to climb to new all-time highs. Gold bugs have a lot on their side. Central banks are easing (for the most part) and the biggest fiat money – the USD – is toast as far as pundits are concerned. The gold buying spree by China and other countries in order to reduce their US bond holdings in a bid to avoid future potential sanctions by the US and others if they invade other countries is also a well-known narrative backing the idea that gold prices will continue to rise. This mantra will hold until it doesn’t, of course.

The ratio chart shows that despite the big run higher in gold prices, the S&P ratio is not at big lows yet. This would change if the stock market fell hard of course, and to be fair the ratio has been dipping lately.

The chart below is one that we use at times when looking at the Turkish stock market (semi-log). In TRY terms, the market has done well this year. In USD terms (top window, red line), the last few years have been marked by range trading at best. A stable TRY has eluded investors since 2018 or so, as the weakening trend vs. the USD accelerated at times. At some stage this may change, which could reward non-TRY based stock market investors. 

The final ratio chart shows the MERVAL index from Argentina (lower window, semi-log). News that the US administration has been buying pesos and setting up swap lines as well as organising private investors to buy up to $20 bn. in local bonds is worth pondering. The US government can of course bailout countries and encourage investments in order to pursue policy goals.

There is a risk of good money following bad, of course. The success story of the Milei government boosted the stock market over the last few years in a big way. In USD terms (top window, red line) the gains have also been sharp at times, but a lot more choppy. The suspicion is that the US lifeline may help for a while, but Argentina risk is notoriously difficult for bond and stock market investors over time. Keep an eye on the red line over the coming months to see if sentiment really improves, or not.

Gerry Celaya,

Chief Strategist