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Is It Risk-On Again?

By James PicernoMarket OverviewFeb 09, 2023 07:35AM ET
www.investing.com/analysis/is-it-riskon-again-200635168
Is It Risk-On Again?
By James Picerno   |  Feb 09, 2023 07:35AM ET
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This year’s rebound in asset prices around the world suggests that investor sentiment is shifting to risk-on after a year of playing defense. Trying to divine the future for pricing is always precarious, especially in the near term. But there’s no charge for looking at proxies of key market trends through various ETF pairs. As we’ll see, certain slices of markets are predicting a new bull run, but it’s still early to ring the all-clear signal, according to a broad measure of US stocks relative to US bonds, which is arguably a more reliable indicator. But let’s start with the sizzle.

The poster boy for the recent change in risk appetite is captured by the recent spike in the ratio between high-beta US stocks (SPHB) and their counterpart via low-volatility shares (SPLV). The key question: Will this gauge of sentiment hold on to its latest gain and maintain an upside bias?

High Beta S&P 500 vs Low Volume S&P 500 Stocks
High Beta S&P 500 vs Low Volume S&P 500 Stocks

Another way to gauge the appetite for risk sentiment is by tracking how discretionary consumer stocks (XLY) perform relative to their more defensive counterparts via consumer staples (XLP). Here, too, a sentiment change is visible, but the shift is weaker compared with high beta/low vol.

US Cyclical vs Non.Cyclical Stock Market Trend
US Cyclical vs Non.Cyclical Stock Market Trend

By contrast, a proxy for the housing outlook looks red hot, based on homebuilder stocks (XHB) relative to the US Treasuries (IEF). It’s debatable if this slice of the market is getting ahead of itself, but to the extent, this is a leading indicator for economic activity, it’s screaming that it’s off to the races once more.

US Homebuilders Equities Trend - Price Ratio Daily Data
US Homebuilders Equities Trend - Price Ratio Daily Data

Another proxy for the business cycle and demand for risk assets is the ratio between semiconductor stocks (SMH) and the broad equities market (SPY). The assumption here is that semis are highly sensitive to the business cycle and therefore offer early signals for major turning points in economic activity. On that basis, there’s a clear change underway.

US Semiconductor Stocks vs US Stocks Daily Data
US Semiconductor Stocks vs US Stocks Daily Data

Turning to commodities, the ratio of United States Copper Index Fund (NYSE:CPER) to SPDR Gold Shares (NYSE:GLD) prices indicates a modest improvement in risk appetite but far more cautiously than the indicators via equities shown above. The idea here is that copper demand tends to rise and fall with economic activity vs. gold’s traditional role as a have in times of turmoil.

Copper-Gold Trend Daily Data
Copper-Gold Trend Daily Data

Finally, consider broad measures of US stocks (SPY) vs. US bonds (BND), which is arguably the primary estimate of the crowd’s market sentiment. On this front, the trend remains choppy and stuck in a holding pattern. In effect, this indicator is advising that a wait-and-see strategy is still warranted.

US Stocks - US Bonds Trend Daily Data
US Stocks - US Bonds Trend Daily Data

Is It Risk-On Again?
 

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Is It Risk-On Again?

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Comments (5)
Jimmy John
Jimmy John Feb 09, 2023 2:09PM ET
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Check back with US in the 3Q
Feb 09, 2023 12:13PM ET
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Never trust Barani. It is time to sell everything
First Last
First Last Feb 09, 2023 12:13PM ET
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Too cowardly and/or stupid to post that in a Barani article.
Feb 09, 2023 12:12PM ET
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Never trust Barani. It is time to sell everything
Robin Hood
RobinHdJr Feb 09, 2023 11:29AM ET
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If the Fed is so eager to curb inflation, jobs, to the risk of causing a recession, why don't they lead by example and get rid of their own jobs first? #AuditTheFed #EndTheFed
Peter ONeill
Peter ONeill Feb 09, 2023 9:47AM ET
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Fed is saying rates will be at 5.1%+ for 12+ months minimum.. while the markets have priced the rate will only hit 4.7% (already passed this level) before Fed cutting it during the summer. The Fed only has 2 reasons to cut rates and 2 reasons only 1) Inflation is controlled and the Feds job is done so can be less restrictive 2) A major recession has started so the Fed needs to cut rates to create growth. With wage growth below core inflation despite the lowest unemployment level in 50 years... and Energy prices restrained despite the war in Ukraine - both will rise again on the first hint of no recession = Fed will have to tighten even more and for longer then the market has priced in. It really is a no win situation for the Fed. Zero chance can you get inflation @ 2% with 11 million open roles and $4 Trillion in excess M2 money supply still in circulation - and still have no recession / very soft landing (but thats what the market currently priced at)
Feb 09, 2023 9:47AM ET
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I think too many people fail to realise inflation is accumulative not a standalone event and the chances of getting both a soft landing and inflation back to 2-3% this year are highly unlikely, yes you may be able to have one or the other but both are near impossible to achieve as we can see as chances of a soft landing have risen recently so have indicators of higher inflation.
Peter ONeill
Peter ONeill Feb 09, 2023 9:47AM ET
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 Yes but the Fed will keep on raising rates / keep rates at a higher level for longer the more it thinks it will take to control inflation and get to 2% - which increases the chances of recession (plus the US economy has largely been maintained and feed on stimulus and debt for the past 15 years - The US does not know how to grow in a High QT Cycle without this 'drug'). Esp. when US household and credit debt are at their highest point ever, US National Debt is at its highest point since WW2 and US savings are at their lowest levels since 2008.
 
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