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Anyone knows Michael A. Gayed? I recently found him on Twitter (https://twitter.com/leadlagreport), he is a portfolio manager that relies heavily on the lumber/gold ratio. The rational is that when the economy is strong, there is more construction and lumber goes up. And when the economy slows down, so does the price of lumber.

Anyway, he tracks the lumber/gold ratio to determine if we are in a risk on or risk off period. Since I follow him (2-3 months?), he has been a good stock market weatherman and right now, he thinks the price of lumber might have reached a short term bottom, so it's risk on.

I'm new to this technical game but the indicators I have so far are also pointing up. Anyone sees it differently?

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.

BSD,
Thanks for that article.

Are they using 3 month futures in their comparison or 13 week returns on 1 year futures?

How do these buy-sell dates compare to your system? (I see that you have days where you are completely out of the market so I assume it's completely different)

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.

And by following him, I have also noticed that his posts about conditions favoring either risk-on or risk-off is always a bit late. Not bad but not perfect. But for people who don't want to spend time at developing a strategy, he can be an interesting alternative.

No, I don't make much personal use of lumber futures as compared to gold as I haven't found the ratio to be sufficiently nimble for trades that may be closed in 7 to 30 days, but these kinds of studies are still worth perusing. Why so? It's still useful to know about a possibly imminent king tide even though you choose to run along the shoreline with the use of a conventional tide schedule. The latter function like clockwork, being the result of the moon's known travel route and resultant gravitational pull, whereas other factors make king tides a bit less predictable and manageable. It's kind of a waste not to make use of a runnable shoreline, even with an awareness a king tide is coming. We'll know when it actually does muck with the more usual tide functions and can leave the beach when it finally happens.

Concerning the actual parameters in the study, Mr. Gayed used a 13-period average of weekly spot prices on random length lumber futures and gold as quoted in US dollars per troy ounce and aligned to risk-on when lumber futures outperformed gold futures, as examined weekly. Random length lumber futures contracts actively trade in 3-month expiry time frames (Jan, Mar, May, Jul, Sep, Nov) and are priced in dollars per thousand board feet. The 'spot' prices quoted on most platforms are for the future contract closest to expiry. Some platforms do not include random length lumber futures quotes any longer because there are additional newer restrictions to trading these as compared to equity futures (lumber futures are not to be confused with e-minis).

I mentioned in the prior post that the S&P400 (/EMD) turned risk-on this Tuesday. The S&P400 is statistically cheaper than the other equity indexes, incidentally. The S&P500 (/ES), and DJIA (/YM) turned risk-on Thursday, and the NASDAQ 100 (/NQ) did so on Friday, so it looks like it's really 'risk-on' for who knows how long. It's difficult to get too excited despite the reduced inflation numbers because there is every reason to assume there are going to be some downwards earnings surprises for a while.

Confirming what metrics define "risk on" in SPX or $COMPQ according to this dude Gayed?

13-period average of weekly spot prices on random length lumber futures and gold as quoted in US dollars per troy ounce and aligned to risk-on when lumber futures outperformed gold futures, as examined weekly.

So how does he apply that to the indexes?
Is it SPX 13wk daily price avg > average lumber or gold 13wk daily $/troy ounce or whatever? So, stocks compared to a commodity?

Or, stocks price to 13wk average and/or 13wk average compared to its own prior average?

FC

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