Recently, there were numerous references in mainstream financial media to the lumber/gold ratio and its potential link to a correction in stock market.
There were numerous articles in the last few weeks about the lumber/gold ratio even in what considered credible mainstream financial publications. The articles attempted to link a drop in the ratio to a coming correction in the stock market.
What does dividing lumber by gold actually mean? It means nothing actually, it’s a random ratio. Below is a relevant chart.
The two top charts show continuous (not adjusted) lumber and gold futures since about 1979. The third chart shows the lumber/gold ratio and a chart of S&P 500 without a scale.
The first three red circles show occasions when the ratio peaked and then plunged; there is no link to market corrections. An attempt was made in some articles to link the fourth plunge in the ratio to the 2018 correction. Most charts did not even show the previous three peaks and subsequent plunges but only the one in 2018.
It may be seen from the above chart that the lumber/gold ratio is noise. The 252-day correlation for daily percent changes of the ratio with those of S&P 500 has varied all over the place and the average is around 0.1; it’s a random correlation.
There is nothing here but it is curious why some credible financial publications elected to publish articles about this ratio. I understand when this is done by technical analysts in blogs but when noise is published in mainstream financial publications their credibility is affected. They should have some peer-review board to examine articles before publishing them, in my opinion. Credibility is important and they should try to guard it.
Disclaimer: Nothing in this blog constitutes a trade recommendation. Read the full disclaimer here.
Charting and backtesting program: Amibroker. Data provider: Norgate Data