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The ratio that rises with no buyer — March 2020

Article

The extreme

A ratio between two prices can rise without anyone buying the numerator. At the peak of the domestic panic of March 2020, two intermarket ratios shot up: Commodities/IBOV and IFIX/IBOV. Seen from the outside, they looked like enthusiasm — capital rushing into commodities and real estate funds while everything else sank. It wasn't. It was the denominator giving way faster than the numerator. When the IBOV collapses, any asset that falls less appears to rise in the division, without a single extra buyer ever showing up.

In numbers: Commodities/IBOV jumped from -1.13 to 3.09 — the largest move of the month, Δ +4.22 — and IFIX/IBOV rose from 1.02 to 4.16.

What happened next

The proof lay in two details. Commodities are quoted in dollars, and the dollar closed the month at R$ 4.8839, flagged as a statistical anomaly: part of the jump in Commodities/IBOV was merely the exchange rate repricing in reais what was already quoted abroad. And there was a contrast that dismantled the flight-to-quality reading — Finance/IBOV retreated from -0.50 to -1.91. The banks fell more than the very index that was already falling. The signal of fear was right there, in the conviction of the dumping, and not in the ratios that were rising.

What did not happen

The ratios that rose did not herald a new market leader. No one migrated to commodities or real estate funds out of conviction that month; those assets merely resisted the liquidation a little longer. And the rise in the ratio did not mean a gain in price: an asset can rise in the division and fall in reais at the same time. Anyone who read the numerator as strength read an arithmetic illusion.

The honest verdict

Rising in the ratio is not rising in price. In a month of liquidation, the intermarket ratio measures relative speed of decline, not appetite. The Perene Risk Index confirmed the backdrop: it went from 0.0 to 10.6, but on the way out of risk, not on the return of appetite.

Continue reading: Commodities measured in reais · The dollar as a regime thermometer · Was March 2020 the bottom? →

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Characters: Structure (intermarket) · Flow (risk appetite)