A key ratio to watch to indicate turning points in the market is the XSO:XFJ ratio (Small Ordinaries to the 50 Leaders). The Small Ordinaries tends to out perform in Bull Markets and under perform in bear markets.
During the March to May rally, the XSO:XFJ ratio favoured the XSO, clearly outpointing the XFJ. From mid-March to about three weeks ago when the market topped, the XSO:XFL rose from 0.41 to 0.52.
After the market topped there was a brief period when the ratio favoured the 50 Leaders and it fell from 0.52 to 0.51.
While the market has been consolidating sideways, the XSO:XFL ratio once again favoured the small ordinaries, up from 0.51 to 0.53 - a new rally high.
This suggests that this rally is not yet done - risk aversion is absent.
That is, until Friday. On Friday we had a strong day in the market. The All Ordinaries was up 1.6%. The XJO was up 1.7%. The 50 Leaders was up 1.8%. And the Small Ordinaries was up just 1.2%.
It is only one day. It might just be a one off.
But - on such a strong day, for the 50 Leaders to have a significantly bigger percentage gain than the Small Ordinaries is noteworthy.
This divergence from recent history may be the beginning of a reversion to a bear market and bear market ratios, with the 50 Leaders falling less than the market as a whole and much less than the Small Ordinaries.
A fall of this ratio below the level we saw about three weeks ago would suggest a clear turning point in this market and a reversion to the bear. We shall see.
Other ratios that I watch carefully for some idea of turning points are various sectors to Gold, and Health to Energy.
Of particular interest is the Gold:Energy ratio. The argument is that energy will perform relatively well when optimism about the economy is high and Gold will serve as a relative safe haven when pessimism returns (at least for a short while).
From late February until about three weeks ago (the top of the market) the XGD:XEJ Ratio (Gold to Energy) favoured the Energy sector, with this ratio falling from 0.48 to 0.32.
Since the top of the market this ratio has favoured the Gold Sector with the ratio rising from 0.32 to 0.37.
The change in the Gold:50 Leaders (XGD:XFJ) favouring the Gold Sector is even more marked. It has risen from a low of 1.23 to 1.53.
I'm still waiting for some indication that the Energy:Health ratio is beginning to favour Health over Energy. If/when that occurs, I think we can safely say that the bear is back in control.
(20min delay)