Lumber/Gold Ratio Trading Strategy For Stocks And Bonds (Rules, Backtest, Performance)
In May 2015, Micheal A. Gayed published a paper called Lumber: Worth Its Weight in Gold Offense and Defense in Active Portfolio Management (free download at SSRN). We used that paper to make a profitable lumber/gold ratio trading strategy for stocks and bonds.
Let’s explain the strategy’s reasoning, trading rules, backtest, performance, and results.
Related reading:
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Lumber as a cyclical indicator
You might wonder, why lumber?
Gayed explained it like this:
Lumber futures are often overlooked as a leading indicator of economic growth, but they may be just as important as industrial metals like copper.
Housing and construction are significant components of the business cycle, and housing greatly influences consumer spending and is the primary store of wealth for most Americans. Unsurprisingly, housing permits are one of the key leading economic indicators in the U.S., ranking ahead of the S&P 500 in their ability to signal a turn in the economy.
In other words, lumber futures may be a valuable tool for investors and policymakers who want to get an early warning of a recession or economic boom.