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Ratio of Equal-weighted to Market capitalization-weighted S&P 500 Index
The ratio of equal-weighted S&P 500 Index to its S&P 500 market capitalization-weighted Index can be constructed using two Exchange traded funds: the SPY (S&P 500 SPDR) and the RSP (Rydex S&P 500 Equal Weight). The S&P 500 equal-weighted indice has the same constituents as the capitalization weighted S&P500, however a fixed weight is allocated to each company compared to a variable weight (depends on the company market capitalization) for the standard S&P 500 index.
This stock market breadth indicator can be used to predict the market direction, detect market crashes or increase in market volatility.
Using monthly data, the correlation between the ratio return (over past month) and the SPY next-month return is equal to 0.4 or 40%, which indicates that this market breadth indicator may be used as a leading indicator to predict S&P 500 index monthly changes.
Using Weekly data, RSP/SPY does not seem to predict near term SPY returns. For more information: http://www.cxoadvisory.com/15772/technical-trading/rspspy-as-a-stock-market-breadth-indicator/
This trading indicator requires that the two ETF symbols (SPY and RSP) are included in your symbols list and loaded with historical data. You can also apply the RSP/SPY indicator to intraday time frames if you have the appropriate data for both ETFs.
The indicator name is "RSP_SPY" and it uses the "GetSeries" function to retrieve external symbol data.
Trading financial instruments, including foreign exchange on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in financial instruments or foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
