The ratio of copper to gold performance points to a risk-averse marketplace. Bloomberg News            
 
 
There is an ample body of research telling us that some of the biggest and most exciting rallies take place in the context of a bear market. Bottom-fishers get active. And short sellers scramble to lock in profits at the first hint that the decline is over.
 
Over the past few days, price action has been hot. Volume perhaps was good, too, with New York Stock Exchange levels above average. But beneath the surface there is still too much evidence pointing to a weak market and likely lower prices ahead.        

Fundamental analysts might cite ratios to back up whatever thesis they have. Price/earnings, debt/equity and price/book are but a few of the myriad ratios used to divine the fair value of a stock or the market. But technical analysts use ratios, too. The difference is that they come from the market and not financial models created by the analyst.

For example, relative performance, also known as relative strength, is simply a ratio of a stock or group to a benchmark index such as the Standard & Poor’s 500. I’ve written here extensively about four sectors that I find to be keys to the health of the overall market. They are technology, retail, home building and financials.
 
Right now, all of them are underperforming the market, and the Financial Select Sector SPDR exchange-traded fund shows a clear example (see Chart 1).

Chart 1

SPDR Financial ETF


Despite the brief awakening last week after The Wall Street Journal reported that JPMorgan Chase CEO Jamie Dimon had bought $26 million of company stock, the financial sector proved it was a hollow rally.

Volume for the ETF declined each day on the way up, suggesting that there was no real buying power behind the move.

The ratio of the consumer discretionary sector to the consumer staples sector also continues to decline.

Again, after punctuating its decline with a very sharp selloff earlier this month, the sector rebounded, but not strongly enough to break its falling trendline to the upside. This tells us that the stock market thinks consumers are still not very aggressive with their money. Stocks of companies that sell necessities such as food are doing better than stocks of companies that sell products, such as televisions, that can wait.

No matter what consumer confidence surveys might say, the stock market thinks consumers are not very happy.

As bonds rally and stocks stumble this year, it is not just an asset allocation shift. While the stock to bond ratio is indeed falling, it is only a certain type of bond that is staying strong.

Default risk-free U.S. Treasury bonds are rallying, but corporate bonds are falling. And within the corporate market, there is a great discrepancy between high-quality bonds and low-quality bonds, known as junk bonds.

The ratio of the iShares iBoxx $ High Yield Corporate Bond ETF to the iShares iBoxx $ Investment Grade Corporate Bond ETF is locked in a steep decline that has been in effect since mid-2014 (see Chart 2).

Chart 2

Junk/Quality Corporate Bond Ratio


Every measure of trend and momentum for the ratio points to a continued decline, another indication of the market’s desire to avoid risk.

Finally, from the commodities markets, the ratio of copper to gold performance also points to a risk-averse marketplace. While commodities of all sorts are weak thanks to the global economic slowdown, we can still glean information about risk attitudes with this type of analysis.

Copper, the metal with the so-called Ph.D. in economics for its tendency to start falling in price ahead of an economic downturn and rise ahead of an upturn, continues to lag gold (see Chart 3). The yellow metal is still considered to be a hedge despite its lack of success for the past few years so a falling ratio tells us that investors are still leery.

Chart 3

Copper/Gold Ratio


Not shown on the charts of the iPath Bloomberg Copper Subindex Total Return exchange-traded note (JJC) or the SPDR Gold Trust is that the ratio actually undercuts the low set in February 2009, just as the bear market in stocks was bottoming. The ratio of copper and gold futures is close, but it did not reach its own low set in December 2008.

Ratios among various components of the financial and commodity markets can tell us about the underlying health and attitudes of investors. Right now, it seems that the markets think things are going to get worse before they get better.

Michael Kahn, a longtime columnist for Barrons.com, comments on technical analysis at www.twitter.com/mnkahn. A former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, Kahn has written three books about technical analysis.