Friday, December 7, 2007

Amex Defense Index Relative Gold

most talk is of using world events to predict price movements in financial markets, but here I'll take the opposite approach: using price movements to predict world events. want to Know when the next war is going to start? take a look at the ratio of the DFI to the price of gold:

Operation Iraq Freedom started near the collapse of this ratio at the beginning of 2003. then for over two years defense stocks consistently out-performed the price of gold, even though gold was moving up moderately itself. then gold did better for about a year, and then of course defense again took the lead. but notice the potential double top around the 230 level.

if the recent top holds (and my guess is that it will), then the eventual retracement of this ratio will become very interesting. look at the massive support laid out in the 160 range last year. when we break below that, get ready for another war to start. if the ratio goes below the 117 box, it may mean that a war is being lost.