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Seeking Safety

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.

bwendell 20120703 - treas

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.

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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