Ratio analysis allows us to identify extreme market conditions. Since most "turning points" occur when market conditions become extreme, ratio analysis can be rather useful in alerting us that a turning point may be near, and/or to confirm conclusions derived from employing other technical methodologies such as cycles analysis, price pattern analysis, etc. The ratios discussed in this article are some of the ones I look at on a regular basis. 1) BPOEX:VXO: Since 2004, readings between 7 and 8.5 have marked "tops," and readings between 3.5 and 2.5 have marked "bottoms."
2) BPSPX:VIX: Since 2004, readings between 7 and 8 have marked "tops," and readings between 3.5 and 2.5 have marked "bottoms."
3) CRB:OIL: Since 2000, "spikings" have marked all important "tops" and "bottoms in the price of oil.
4) DJIA:OIL: Since 2000, "spikings" have marked all important "tops" and "bottoms in the price of oil, and in the DJIA.
5) GOLD:HUI: Since 2004, readings between 2.25 and 2.5 have marked "bottoms," and readings below 1.0 have marked "tops."
6) GOLD:XAU: Since 2002, readings between 5.0 and 5.5 have marked "bottoms," and readings below 3.8 have marked "tops."
7) NDX:IBB: Since 2002, readings between 22.5 and 23.5 have marked "bottoms," and readings below 20 have marked "tops" for biotech.
8) SPX:OIH: Since 2006, readings between 10.5 and 11.0 have marked "bottoms," and readings below 10 have marked "tops" for the Oil Service sector.
9) SPX:XLE: Since 2006, readings between 25 and 26 have marked "bottoms," and readings below 23 have marked "tops" for Big Oil.
10) SPX:QQQQ: Since 2003, readings between 31 and 30 have marked "tops," and readings above 32.5 have marked "bottoms" for the QQQQ.
Currently, all ratios are near the middle of their most recent range, implying that the markets in question are neither at a bottom nor at a top and thus, there is no compelling reason to be fully long, or fully short. Ike Iossif
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