Those of you who are familiar with my view on markets know that I am obsessed with downside risk and that I love using early indicators of higher volatility as a weapon for offensive positioning.
Let’s put this ratio to the test via a back test.
While this signal looks strictly at Treasury prices, the practical application of the strategy will involve investing in either the S&P 500 (SPY) or the iShares 20+ Year Treasury Bond ETF (TLT). When the signal is red, Treasuries are the play. When the signal is green, this will indicate that we should move into the S&P 500. I use long-term Treasuries because it provides an opportunity for your portfolio to produce positive returns even when stocks are falling.
Bottom line, in this example, we will always be invested in either SPY or TLT at all times.
Here is the back test: