We get asked — often — “how can you be so sure about these charts?  Look at what the market did yesterday!  Are you sure we’re doing the right thing?”

Now, one of our favorite movies is “My Cousin Vinny”  And when we hear these questions, it sounds a lot like the dialogue between Vinny (Joe Pesce) and Mona Lisa Vito (Marisa Tomei):

Vinny: How can you be so sure?
Mona Lisa: If you will look in the manual, you will see that this particular model faucet requires a range of 10-16 foot pounds of torque. I routinely twist the maximum allowable torquage.

One of “the indicators” we employ is a relative strength measurement of the S&P 500 vs the bond market.  Essentially, what this measurement tells us is, “is it better to be in stocks — OR are we better off in bonds?”

Here’s a picture of that chart, courtesy of our friends at Dorsey Wright:

Relative Strength chart of SPX vs AGG, courtesy of Dorsey Wright & Associates

Relative Strength chart of SPX vs AGG, courtesy of Dorsey Wright & Associates

So, what the heck does this mean?
Buy signals on this chart indicate it’s time to over-weight stocks instead of bonds.
And Sell signals indicate it’s time to over-weight bonds, instead of stocks.

This chart gave a sell signal in November 2000.
Then it gave a buy signal (over weight stocks) in summer 2003
It then gave a sell signal in July 2008 (time to under-weight stocks)
The chart then gave a buy signal in June 2009.
It’s been on that buy signal ever since.

Now, this is not the ONLY indicator we use.  It’s one of several indicators.  There will be times when this chart turns from a column of X’s into a column of O’s.  That only tells us that stocks are weak, sloppy, the market is messy — and our phone is going to start to ring.  That is OK.

So when we get days like yesterday (China down 7%, the US markets down a lot) it’s GREAT to have these indicators to fall back on.  It beats relying on the knuckleheads on CNBC, or the articles on Marketwatch.   Headlines on the Marketwatch website yesterday included phrases like “big losses” and “bear market” and “brace for big selloffs.”

Holy cow.

Your New Years Resolution should be to turn off/tune out that noise.  It will feed on your emotions and trick you into making a bad decision.

Now Go Talk About It!