Ratio charts as regime context for relative strength and yield spreads

A ratio chart reports a proportion

A ratio chart is a series made by dividing one instrument's values by another's, most simply using each instrument's closing prices. The plot shows their changing proportion rather than either level.

Most arbitrary pairs produce unreadable noise. Only a small subset of relationships yields a chart with usable structure. Candidate pairs can be generated in bulk with a spreadsheet symbol matrix and then inspected one by one to isolate the few ratios that look informative.

When an overlay hides a relative drain

Intermarket analysis can start from markets that look tightly linked. An overlay of the Russell 2000 and the S&P 500 can look closely correlated while their ratio is not a flat line and instead forms large, time-varying tops and plunges.

Those tops and plunges can mark a relative drain: the numerator can lose faster than the denominator even if both series still move together on an overlay. The Russell-to-S&P ratio showed a 1990s topping pattern that was followed by a sharp decline, and later a much larger top described as forming for about 15 years.

Equities versus gold stocks

The S&P 500 divided by the Gold Bugs index, spanning almost a quarter of a century in the source chart, displayed three major reversal structures including a millennium-era top, a post-crisis saucer, and a later potential top.

After that saucer, the S&P-to-Gold-Bugs ratio broke out, retraced to support, and then advanced many hundreds of percent from around 2013 to 2018.

The same pattern language on two components

A ratio of emerging-markets EEM over junior miners GDXJ was presented as a case in which the same pattern language used on a single-name chart can be applied to a two-component plot. In that language, base building is a long sideways compression, on the ratio or on one of its inputs, that can resolve into a new relative trend.

Equities versus the 10-year yield

The S&P 500 divided by the 10-year Treasury yield drifted without a clear trend in the 1960s and 1970s, then began a persistent ascent from summer 1982 as equities generally rose while yields generally fell.

That equity-to-yield uptrend was described as holding an approximately 34-degree slope without a break. A completed base and a rise in the 10-year yield were described as a force that could challenge the trendline. TradersWeek editorial reading: the intact slope is a regime statement about the proportion, not a forecast that equities must rise or that yields must fall on their own. The line stays intact until a large enough shift in either component would break it.