From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge
There’s been very little happening on our risk checklist, as evidence for risk appetite remains split between bulls and bears.
The last time we discussed it was in our Q1 Playbook. While the list hasn’t picked a decisive direction yet, the fact that it's such a mixed bag is information in and of itself.
It's been an excellent roadmap for us in recent months, because just like the market -- our risk checklist has also been a mess.
Let's take a look at where we stand and discuss some of the more recent developments.
Here it is, with a current reading of 44%:
This tells us that the majority of checklist items are actually below our risk levels and in risk-off territory. However, when we consider the selling pressure thus far in 2022, the list has held up quite well.
Here's a time series of the percentage of assets in bullish territory charted beneath the S&P 500:
Notice how we haven't breached below 30% or risen above 70% since we created the list this summer.
The fact that it hasn't given us a clear bullish or bearish reading makes perfect sense in an environment as bifurcated as the current one.
Just like markets are full of indecision right now, so is our risk checklist.
The only item to change since the last time we discussed the list is the S&P 500 relative to Consumer Staples (SPY/XLP):
After hitting its highest level in over 20-years, this risk-appetite ratio has collapsed in recent months and flipped from bullish to bearish.
As long as we're stuck beneath the 2021 first-half highs of 6.10, this is a point for the risk-off crowd.
It's too early to tell if SPY/XLP is building out a sustainable trend reversal, but the ratio continues to look more and more like a large topping pattern.
We're monitoring this one closely for signs of further deterioration.
Similar to S&P versus staples, there are a handful of charts trading right around our risk levels. As such, the list could see a quick swing in either direction depending on market action.
Another one of our favorite risk appetite ratios is Equal Weight Consumer Discretionary versus Equal Weight Consumer Staples:
Like SPY/XLP, this chart is just slightly below our risk level of 0.890 right now. Also like SPY/XLP, the ratio has been a sideways mess for the past year.
Both charts briefly resolved higher in the fourth quarter of 2021 but promptly failed and rolled back over to the lower bounds of their old ranges.
The Copper/Gold ratio is another critical risk appetite indicator that's just slightly beneath our risk level these days. Here's what it looks like:
In an environment where interest rates and inflation are trending higher, we'd expect an upside resolution from the Copper/Gold ratio.
But this chart continues to be a range-bound mess.
If and when Copper/Gold reclaims its 2018 highs around 0.0026, it will be a significant development for the bulls and an essential piece of supporting evidence for the new highs in yields.
Next up is the Australian Dollar/Japanese Yen cross:
Like the previous charts, AUD/JPY is just a few points away from our risk level of 84.
This is a frequently observed risk-on pair due to the defensive nature of the yen and the pro-cyclical nature of the Australian dollar.
Bulls want to see a decisive move back above the pivot highs to signal that risk-seeking behavior is alive and well in the currency market.
But, just like the previous three charts, there is no evidence of this yet.
All of these charts are consolidating in messy, sideways trends. And as long as this remains the case, our risk checklist is likely to remain in neutral territory with no clear directional signal.
The bottom line is that we're still seeing a lot of indecision and rangebound action from risk assets and risk appetite ratios.
Until we see more upside resolutions from the charts on our risk checklist, the market is likely to remain a mess.
But it could be worse! At least we're not seeing much in terms of downside resolutions.
We hope you enjoyed this brief update on our risk checklist. We’ll be sure to keep you updated with any significant developments in the future.
But, for now, the evidence remains split between the bulls and bears.
Let us know what you think, and, as always, reach out with any questions.
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