Using Historical Bond Returns to Measure Market Skew
- Posted by DynamicHedge
- on January 25th, 2012
It’s impossible to know exactly when the market will turn. The best you can do is catch a good chunk of the trend. The indicator below does a great job of keeping you on the right side of the big market moves. The blue line on the chart represents a proprietary indicator measuring the skew of a multi-asset spread ratio of large cap equity returns vs liquid bond returns. When the skew line is above zero it means that funds are flowing into risk assets. When the skew line is below zero it means that investors are more risk averse. I’ve overlaid a chart of the S&P 500 with the skew direction tinted. As you can see, it’s done a great job of giving you a heads up around trend reversals and generally keeps you on the correct side of the market. As a side note, this indicator typically generates around two signals per year. So when it does move, it marks a big trend shift.
The market remains on the positive side of the zero line. Let mathematics be your guide through these troubling market times.
I’ll keep you updated as this develops.
Click here for a ginormous version going back to 2007. I’ve taken to calling it MAMO (multi-asset macro oscillator).
Disclaimer: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please click here for a full disclaimer.
DynamicHedge is an equities, futures and derivatives trader based on the West Coast. He runs a long/short opportunistic relative-value strategy within a proprietary trading group. More
- 70 days of suffering in WalMart
- April is very bullish in a weird way
- Representativeness Bias: Easy Classifications
- Confirmation bias: A dependable filter of objective information
- Conservatism Bias: How to know what new information to focus on
- Sentiment Flip
- Pardon the interruption
- Wait for the market to flex
- How SPY typically trades after a gap up/down on NFP report
- Ebay Monster Gaps