Purchasing power increased in that more gold or commodities could have been purchased in 2000 than at the time of the initial investment in 1989. The price levels during 1989 suggest that buying the SPFI was relatively inexpensive. The 1998 and 1999 peaks of the RS line and the peaks of MACD diverged - indicating that for the first time the acceleration of this trend had changed at the primary level.
The third divergent peak occurred in 2001 and the reversal of the RS line and price was confirmed in 2002. The RS line falling into a downtrend indicated that the SPFI or the financial sector was beginning to under-perform gold. The SPFI price chart developed a Head and Shoulders top pattern that failed to complete to the downside, which usually means significant upside in prices ahead.
After the final bottom in price and RS in 2003, prices rose while RS remained flat and eventually entered into a down-trend indicating that while the price of the index rose, the amount of what it could purchase fell. At this point, the investor should understand, in this sector, money is being made but purchasing power is being lost at a higher rate and a defensive strategy should be employed.
Backing up, now that we know that the financial sector may be a reasonable investment, let’s look at the performance of one of it largest and most popular stocks, Citigroup, (NYSE: C), and look at how this stock performed over the same time period. In this second chart, Citigroup is compared to gold. During the 1989-1991 period while the sector was out performing gold (increasing purchasing power), Citi failed to do so. Therefore, without looking at other stocks in this sector, it made more sense to own the index than Citi.
The next chart to examine is the Citi/SPFI ratio chart. Here we see that Citi under-performed its sector index during the period in question and examining the Citi/SP 500 RS chart, Citi under-performed the broad market index as well. What this all says in a nutshell is that during the 1989-1991 period, there were better places to invest one's capital than Citigroup.
This changed across the board in 1992. From this point forward we see Citigroup’s out-performance in all comparisons. In 1994 the RS charts with the exception of gold had peaked and turned down until 1998. The gold RS bottomed in 1995 and headed up signaling Citi’s increasing purchasing power but sub-par performance against the broad market and sector indices.
The final highs of the RS charts came in around 2000-2001, and bottomed in 2002 then rallied briefly, diverged from price dramatically, and accelerated to the downside in the latter part of 2007.
A review of Citi’s price chart since 2002 reveals that during a time of outstanding profits and billions in bonuses, Citi’s price activity was anemic. It simply did not confirm the fundamentals. The discreet signals of the RS charts could have, if heeded, given warning that not only was Citi no longer performing well but the entire sector was under-performing despite the media and industry propaganda.
The yearly price chart of Citi shows what can happen when markets become greatly distorted. The buy and holders in this instrument gave back fairly sizeable nominal gains. But real gains have eroded the greatest since 2001 not 2007.
This has probably sparked more questions than it has answered, but that is the point. A door has been opened; walk through if you choose. Look around and see if there is anything useful; let curiosity fulfill its purpose.
Chart your own Relative Strength charts
Charles Hugh Smith is a writer and financial commentator living in Berkeley, CA. His writings on financial markets and the absurdity of American lending standards has been republished and syndicated on several web sites. He has published a book, I-State Lines which has drawn critical praise from local bookstores around the United States. Visit his web site for an ad-free, independent exchange of ideas.