Friday, September 7, 2012

Real S&P 500 to Initial Claims Ratio (Musical Tribute)

Click to enlarge.

We're getting dangerously close to the top of the channel again. Feeling brave?

See Also:
Initial Claims Danger v.13

Source Data:
St. Louis Fed: Custom Chart


Stagflationary Mark said...

As initial claims spike higher the real S&P 500 tends to tank.

So the question becomes one of timing. When will initial claims spike higher again?

I predict it will sooner than Wall Street would have us believe.

Jazzbumpa said...

Wow - this is an obscure ratio. What made you think of it? It's going to take me a while to wrap my head around it.

Ratios invite abuse.

I wonder how somebody could misuse this one?


Stagflationary Mark said...


What made you think of it?

I've been in an initial claims mood lately because I think we might be nearing the turning point. The stock market generally doesn't do well once the bottom is truly in on initial claims.

This thinking made me wonder what a ratio between the inflation adjusted stock market and initial claims would look like.

In a bull market the numerator would grow while the denominator shrinks.

In a bear market the numerator shrinks while the denominator grows.

I therefore figured that the chart might have something interesting to say.

I wonder how somebody could misuse this one?

I can think of 4 ways right off.

1. The chart seriously amplifies the actual risks in the stock market. That might be good if you are trying to see them and are willing to factor that in. Huge swings in this chart do not necessarily translate into huge swings in the stock market though.

2. A person could look at this chart and conclude that the ratio could fall below zero during the next crash. That's not going to happen. It's impossible. It would require the S&P 500 to go negative (which it clearly cannot do). These smooth red channels will be forced to break down as zero is approached (much like they did in the late 1970s and early 1980s).

3. The trends in these channels are guaranteed to fail at some point (see Point #2). My gut says that we have at least one more serious downleg. The chart suggests that too. However, it is still just an opinion.

4. No chart of an "obscure ratio" (agreed) can predict the invention of Mr. Fusion (or lack thereof) or an outbreak of a global epidemic (or lack thereof).

I have been in the permabear camp since 2004 (also a bit obscure for most). I do not have 100% conviction that I should be. It's more like 95%. This chart does little to alter my opinion though. Sigh.

Stagflationary Mark said...

Bonus Thought

Note that both red bands were during periods of generally rising real oil prices. I doubt very much that it is just a coincidence.

Jazzbumpa said...

Mark -

Very thoughtful response. Thanx.

That first red band, at least from the top of the first peak, corresponds with decade plus period where the stock market went nowhere, and got badly eaten up by inflation.

Since 2000 S&P has made a similar sawtooth pattern, but with muted inflation.

Now I have to ponder the denominator effect. When N and D tend to contrary motion, you get sharp peak emphasis. That might be a valuable tool.

I'm beginning to appreciate this ratio.


Stagflationary Mark said...


I think it underscores that the things that make up the good times are linked and the things that make up the bad times are also linked.

During the good times we are blessed with both high stock prices and low initial claims.

During the bad times we often get the opposite.

I think this allows us to be too optimistic when times are good and too pessimistic when times are bad.

As seen in the chart within this post (and as hard as it is to believe), times are pretty good right now. If history is a guide, I doubt it will last. I have other reasons that I am skeptical as well of course, or I would not be running this blog. Sigh.