No. of Recommendations: 10
Hi Jordrok,
It's an ostensibly interesting concept for which Mr. Gayed wrote a short paper that received certain accolades several years ago (link:
https://papers.ssrn.com/sol3/papers.cfm?abstract_i... for those who are interested). Would-be users of the ratio should be aware he is using lumber futures as distinguished from a lumber ETF, likewise for gold. While the ratio seems to correlate with the American equities markets sometimes, at other times it does not. For example, traders waiting to adopt a risk-on posture in mid-October '22 missed some mid-term opportunities, moving to risk-off at almost precisely the "wrong" time. A similar instance occurred in July '22. In fairness to Mr. Gayed, he explains that there may be a delay in the ratio signal's significance, but we just illustrated two of many instances where following the ratio incurred costly errors of omission for attractive risk-on opportunities.
There do seem to be indications of a general trend to risk-on at present. Interestingly, the S&P400 index (/EMD, emini future) is currently a buy with the strategy I employ, which is something of a head-scratcher in context of the greater interest-rate sensitivity of many names in that index.
