How To Spot Boom And Bust Cycles

One of the most important aspects of trading is being able to properly identify major market cycles and trends. The markets will typically move between four separate stages: Bottoming/Basing, Rallying, Topping/Distribution, and Bearish Trending. Each of these phases of market trends is often associated with various degrees of market segment trending as well. For example, one of the most telling phrases of when the stock market is nearing an eventual Topping/Distribution phase is when the housing market gets super-heated. Yet, one of the most difficult aspects of this Excess Phase rally trend is that it can last many months or years, and usually longer than many people expect.

Until Gold Really Starts To Rally, Expect A Continued Rally In The Stock Market

When an Excess Phase rally is taking place in the stock market, we expect to see the Lumber vs. Gold ratio moving higher and typically see the RSI indicator stay above 50. Demand for lumber, a commodity necessary for building, remodeling, and another consumer essential spending, translates well as an economic barometer for big-ticket consumer spending. Extreme peaks in this ratio can often warn of a pending shift in consumer spending and how the stock market reacts to an Excess Phase Peak. Let’s take a look at some of the historical reference points on this longer-term Weekly Lumber vs. Gold chart below.

First, the 1992 to 2005 ratio levels represent a moderately low Gold price level compared to a somewhat inflated Lumber price level. You can see how that dramatically changed between 2005 and 2012 – this was a time when Gold started a historic rally phase just before the Housing/Credit crisis of 2008-09.

(Click on image to enlarge)

Since that time, the Lumber to Gold ratio has stayed below historical low reference points (near 0.6). This shift in the Lumber to Gold ratio suggests that demand for Gold outpaced demand for Lumber over the past 10+ years. Now, the Lumber to Gold ratio is climbing back to levels near or above that 0.6 level and may soon move higher if the post-COVID economic recovery continues while demand for Gold stays somewhat muted.

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