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About Me

Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Wednesday, February 08, 2012

Risk On vs. Risk Off

One quick measure I use to evaluate the status of the "risk on vs. risk off " trade is to watch the
SP 500 in the form of the SPY against the long (30 yr.) Treasury. SPY:$USB

The relationship between the stock and bond market can shift around over time, but this measure
has been helpful in recent years. Note the "buy stock" points of Aug. 2010 and Oct. 2011, when
stocks rallied and the bond price faded at .75 relative strength. Note as well that when relative
strength of the SPY gets close to or exceeds the 1.02 RS level, that you get a caution sign that
stocks are perceived to be doing a little too well relative to the bond. The current RS reading for
SPY against the long guy is .95, which suggests the relationship is beginning to mature based on
the recent economic environment. Interesting stuff in the current mileu.

I would also call your attention to when the RS of the SPY breaks below the 20 day m/a with this
followed by a downturn of the "20", you also get a heads up which tells you to pay much closer
attention to the economic fundamentals.

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