Chart of the Day: One Simple Way to See Market Turning Points

by Enis May 8, 2012 7:40 am • Commentary

Today’s chart presents one of the best signals I know for following broad shifts in institutional investor asset allocation.  Are the big boys getting offensive or defensive?  Striding confidently or taking shelter?  In other words, buy the broad market (SPY) or safe, boring utilities (XLU)?  Here’s a ratio of XLU / SPY since the beginning of 2011, with a higher ratio signaling a more defensive posture by investors.

Source: Bloomberg

With red circles, I’ve highlighted the dates of the major highs and lows of the SPY over the last year and a half.  It’s impressive how closely this ratio’s turns mirror the turns in the broader market.

It’s not foolproof, as it bottomed in Feb 2011, and the market made one more marginal high in May 2011, but getting defensive in Feb would still have been a good idea.  The Oct 3rd, 2011 low coincided with the high in this ratio, and the beginning of 2012 saw a strong move lower in the ratio, indicating a desire by institutional investors to rapidly posture more offensively.  Looking to this year, the ratio bottomed in mid-March, slightly before the Apr 2nd high, and had a strong week last week.  It warrants caution and significant patience before taking any long-term bullish stance.