Sunday, April 24, 2011

Introducing Sector Rank Spread

What is Sector Rank Spread? It is the maximum spread over the ranks of the offensive SPDR sector ETFs. For example, as of last week, the highest rank in the offensive SPDR sector ETFs is 69.86 of XLE, the lowest rank is 22.18 of XLF. Thus the Sector Rank Spread is 69.86 - 22.18 = 47.68. This week the highest is still XLE and the lowest is still XLF, but the spread increased a little bit to 47.83. Read more on ETF Ranking and Fundamental Ranking.

Where is SRS? It is located to the lower right corner on my blog. Unlike the Big Money Index, SRS is calculated and updated every weekend.

Why SRS? Economists use the velocity of money to measure the activeness of the economy. My understanding is that standing still money doesn't create any economic value, money create economic value whenever it flows. GDP, the economic barometer, is the sum of the dollar amount of trade, i.e., money flow among parties. Similarly in the stock market, money flow drives price appreciation and depreciation. Money flowing into an asset class will help to mark up the price of the asset class, and vice versa. The SRS is designed to gauge the tendency of money flow among offensive sectors. Sectors, represented here by the SPDR sector ETFs, with higher fundamental ranks offer better economic value, and thus attract more money flow. Therefore, the larger the SRS, the better the chance that money will flow out of the one sector (supposedly with lower rank) and into another sector (with higher rank). If the spread is minimal, money flow would stall. So SRS is another way to measure the money flow, and the activeness of the stock market. Intuitively, high SRS indicates the market can still move up, while low SRS may prelude consolidation or correction. That said, I don't have historical data to show how high is high and how low is low. This is a new indicator and I only have two data points. Let's watch it overtime to see how it evolves.

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