Smoking or Non-Smoking?

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I am a fan of correlation. While I don’t think anything is ever correlated forever, there are times when it can be most useful. I will usually use the fancy word “proxy” both because it sounds better and it rhymes with “foxy”.  You know how I roll.

The doldrums of summer have been volatile. The ONN/OFF action can make you dizzy. Right now markets have easing from China, a fresh new (just like the old one)  Unlimited Dollar Funding Machine (tm), and economic numbers that don’t suck. Sentiment amongst market leaders has turned positive and, well it’s the end of the year.

I agree. My line in the sand for being constructive on longside of the market is S&P 500 above 1230. Seems 1240 became the new floor today. But there is another signal that makes me think a more aggressive move up in the indices is at hand.

Defensive sectors serve as a haven, but you have to find the right ones. Here is what I am looking at.

I highlighted as a long idea the stock RAI (Reynolds American Inc) a few times. Here is the chart:

 

 
After this weeks intervention, as strong as this chart is, it got me thinking. Are cigarettes a correlation to the risk on/risk off trade? Maybe.

Via Yahoo charts (yes I still Yahoo!; I like the look of the comparison charts) here is what the last 6 months looks like for RAI vs S&P 500:

And a 3 month:

Please notice that in August and every time after the space between RAI and the S&P has served as a great market timer. Note the late September gap and how it caught up. And again the huge gap of mid November that closed.

Topping pattern in a strong stock that is a proxy for the S&P, now converging. Keep an eye on this relationship. It’s worth watching.

Have a good night.

23 Responses to “Smoking or Non-Smoking?”

  1. Great post, 5/5. The correlation is definitely interesting, and RAI does seem to be leading the S&P. Do you see the topping of the defensive stock as bullish or bearish?

    Also congratulation on getting your blog shouted out.

    • I suppose I mean: Is it more common for the gap to close via a decrease in RAI, increase in S&P or both?

  2. TJ, if the gap narrows its bullish for overall market. It’s clear in the charts. October was a good month, yes?

  3. Yep great stuff. I also echo TJ’s question – I’m not sure what to make of the correlation. (sorry in advance for being dense)

  4. I’ve been allocated to RAI for a while now myself, but hadn’t thought to look at the relationship (not too many companies out there with the sole goal of maximizing earnings payout).

    Nice post my man.

  5. Impressive post.

  6. Using any 1 stock is tough because outside factors can come into play. This post shows that for the 6 month and 3 month time frames the relationship is as the gap between RAI and S&P gets wide, it’s a sign for a move up in say “risk” class. I do expect it to narrow going forward, and the jobs number tomorrow will be a sign.

  7. Terrific post. Really appreciate your charts, too. As you said, using any 1 stock is tough – would be interesting to see how those charts would look if one or two alcohol / brewery stocks were included. When I think of cigarettes, I think of alcohol. Lol

  8. Thanks Sarie! The stock BUD is a messy correlation, and missed other inflection points last few months.

  9. Neuce post. I like the way you think. I’ll be watching you…

  10. Thanks Grave, always looking out for you too.

  11. Great write-up! I found your cigarette correlation extremely fascinating. It’s the first time I’ve seen that connection.

  12. Makes sense DJB! Thank you!

  13. Makes sense to me and the Morningstar Cigarette Industry chart displayed the same pattern along with MO & PM. Nice job in throwing in those new risk ETF’s as well (let’s see how these work out).

  14. redman59, I have not seen a Morningstar report in 7 years, thanks for the comment. They do at the minute updates like now too?

    • Haha yea I have never read one of the actual reports. I know that Worden Telechart uses Mornigstar industries as their industry/sub-industry list and you can pull up charts on those all being end of day data but including O-H-L-C and volume.

  15. Any other Q’s are for the morning, see you all later.

  16. “Inquiring minds want to know” is alive and well. Apparently the phrase fits you GYSC to a T. Who would think to pair cigarettes with SPY other then you? Not only that but it seems to be working beautifully! From your charts I see we just might get our Santa Rally. Good work and beautiful charting.

  17. Very interesting….and I still use Yahoo too!

  18. I’m just here to point out the high correlation between pageviews and comments.

    Well done.

    As for the smoking correlation, I expect to see cigarettes pick up in popularity in 2012 as our country implodes during the election cycle. Might throw your data off.

    -DT

    p.s. i couldn’t vote…

    • I plan on escalating my allocation to alcohol both portfolio wise and behavior wise as election gets closer. Thanks DT for comment.

  19. Nice work GYSC!

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