If you have spent any time in the Financial Industry you know there is an internal battle between Insurance and Investments on many different levels. On one hand they come from opposite ends of the financial community, but on the other hand they are completely necessary to each others existence. One tends to be more offensive and the other more defensive. So today when I started reviewing my sectors and came across these two charts it got me thinking. I wonder if the relationship between these two plays out in the broad markets as well?
The easiest way to figure this out is to put them together on one chart and get your ratio chart and plot that with $SPX. The chart below shows us 3 years of this relationship plotted with the index. The outcome seems to work as expected.
Every time this ratio is running higher, the markets seem to struggle. The each time the ratio peaks and begins to fall the $SPX has gone on a strong run. The ratio peaked in Mid October and fell hard in December. If the relationship persist we there should be some gas left in the broad market rally.
Taking a look at the individual sector charts it also favors the ratio chart to continue to drop. First we look at the $DJSINV Dow Jones US Select Investment Services Index shows a big break out this week with RSI in a strong bull range and Relative Strength (RS) soaring. Might want a rest short term, but looks strong otherwise.
The $DJSINS Dow Jones US Select Insurance Index isn’t looking so hot after running into the fall. This chart looks to me more like it wants to rollover here making a lower high. The RSI still in a bull range but struggling with 60 here. We also see at the top of the chart it is losing RS during this last run. Not a good sign.
Put these two together and I think they are hinting the ratio may be going much lower here in the near future. If that happens, strap in because the broad markets could take off faster than you think. Of course, on the other side if it reverses and runs higher the I would say caution is in order.
Take this info and use it to best fit your trading style: risk tell, sector pairs trade, or a place to start to look for individual opportunities. There is a lot we can learn from raition charts so get on your charting software and play around. You will be surprised at what you might find.
(All market data above are derived from Stockcharts.com, Esignal, and Reutersdatalink)