No one can deny that there has been a large increase in volatility in the markets lately. Recently, prices have been subject to large price swings in both upward and downward directions. In this crazy environment, there has been a shift by investors to seek safety in the markets.
So the question is: what is the safe haven that we should seek for our investments? The traditional safe investments include the largest market cap stocks, (“the blue chip”), gold, and US Treasuries. This is not to say that they will continue to be the best safe havens to park your funds in times of trouble. However, we can use the relationships between these safe havens and the stock market as an indication as to when the trends may change.
In my first chart, I am comparing the S&P 500 index with the S&P 100 Index. The S&P 500 index includes all of the stocks in the 100. The S&P 100 index includes the largest capitalized stocks which are typically viewed as the “blue chips.” These two indexes should move together. But when investors get nervous in their views of the economy, they will pull money out of more speculative stocks for the safety of those blue chips. The divergence between the two indexes can signal a trend change.
Gold has often been viewed as a safe investment. It is true that gold prices have jumped dramatically in the recent past. What is interesting is that the cycle of equities and commodities are now in sync and gold and the equity markets are moving together, not inversely. When the relationship moves back inversely, then the move to safety is on.
US Treasuries are also a safe haven for traders and investors. When the correlation between the treasuries and the equity markets reach an extreme inverse relationship, it usually precedes a drop in the markets.
So looking at the relationships between the speculative equity indexes and the safe havens may be an odds enhancer to time your investment decisions. Focus on the supply and demand zones for the exact timing, but use the correlations as additional evidence.