Abnormal Returns - Latest Comments in Ratio charts run amok Abnormal Returns

Re: Ratio charts run amok Abnormal Returns

SBTrades — Sun, 25 Oct 2009 14:23:22 -0000

Using the ratio between gold and $SPX, you are not necessarily showing a stable relationship, but rather showing the value of the companies in the index as valued by a stable currency. This would be the same as measuring the $SPX inflation adjusted, except when you adjust for inflation using CPI you do not get the real value of inflation.

So by using gold (which in theory is a stable currency) you can see your real returns.

Re: Ratio charts run amok Abnormal Returns

SBTrades — Sun, 25 Oct 2009 04:35:42 -0000

There are two things missing here. First is that commodity cycles are very long (20 years or more), so looking at the charts in this case with anything less than 40 years would make no sense in trying to see the relationships. Second there can be no denying that there is a strong relationship between the price of commodities (such as oil) and the economy, so measuring the profitability of companies in the index and measuring the costs of doing business and comparing them does make sense.

To compare them using a ratio as was done, might not make sense, but measuring the commodities relative performance versus the profitability of the index does. Certainly, the relationships in this case can only be shown over the very very long term, so anything less than 60 years makes no sense.

Re: Ratio charts run amok Abnormal Returns

moiselevi — Sun, 25 Oct 2009 03:24:01 -0000

Great point.
I also find that the Russian index is "linked" to oil, try $rtsi:$wtic.
The Dollar and Gold of course ; $Gold:$USD

Re: Ratio charts run amok Abnormal Returns

Michael F. Martin — Fri, 23 Oct 2009 15:57:39 -0000

Nice post.

Re: Ratio charts run amok Abnormal Returns

Michael Goode (aka Reaper) — Fri, 23 Oct 2009 15:49:31 -0000

Thank you for this post ... it annoys me endlessly when people assume there is some stable relationship between gold and $SPX. Rather, the chart shows that they vary in relation to each other (and one would say that about any two non-identical variables).