Charting Your Relationship With Stocks

Some guys cringe when they hear the word “relationship” uttered.

There were, in fact, a few – very few – flinches noted last week when we wrote about the connection between the CBOE Volatility Index (VIX) and the CBOE Implied Correlation Index (KCJ).Some relationships, to be sure,are more cringe worthy than others. The current VIX-KCJ link, we wrote, is benign for stock pickers. Don’t think, though that VIX is exclusive in its liaisons.

There’s also a correlation between VIX and the gold/oil ratio, a metric we explored the previous week.Take a look at the chart below. Pretty much as the gold/oil ratio goes, so goes the VIX. 

(Click on image to enlarge)

Sort of makes sense, doesn’t it? I mean, as gold cheapens (relative to oil), the equity environment improves.

Further evidence of amelioration can be found in the pricing of the ProShares Short High Yield ETF (NYSE Arca: SJB). SJB tracks the unlevered inverse of the Markit iBoxx $ Liquid High Yield Index, a benchmark for dollar-denominated corporate high yield notes.Buying SJB is, in essence, a bet against the stock market. When SJB goes up, stocks go down. It works the other way ‘round, too. Like now. See the chart? SJB’s price trend is the mirror image – that is, the reversed image – of that of the SPDR S&P 500ETF (NYSE Arca: SPY).

(Click on image to enlarge)

SJB’s trajectory dramatically describes the interest rate trend – and the default rate -- for the riskiest segment of the bond market. That’s in vivid contrast to the brightened prospects for bluest of the blue chip stocks in the S&P.

Poor SJB. From its current level, it looks like there’s 10-12 percent more downside ahead.

And SPY? Well, as you can see from the chart above, the mid-2015 top is now being challenged. There’s a possibility of a 25-30 percent upside from here. But that’s in the long term.

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DisclosureBrad Zigler pens's Alternative Insights newsletter. Formerly, he headed up marketing and research for the Pacific Exchange's (now NYSE Arca) ...

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