Supply and Demand
When you get down to brass tacks, asset
prices are governed by supply and demand. In the markets, the conviction
of buyers relative to the conviction of sellers also plays a major
role. Therefore, “I am confident” vs. “I am nervous” ratios can help us
monitor and manage investment risk. What is the market telling us now?
Confident vs. Nervous
One confident vs. nervous ratio,
the S&P 500 relative to the VIX, is shown below. When the ratio was
pushed back at resistance (see point A), weakness in stocks followed
(bottom of chart). Conversely, when the ratio cleared resistance (point
B), good things happened in the stock market. Last Friday (before the
FED), the ratio was revisiting the horizontal blue line, meaning it was
at a possible inflection point (see point C).
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