From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge
Sideways has been the theme for most risk assets since they peaked in the first half of last year. Markets have become increasingly messy in the time since.
If we’re talking about US equities, the market is as bifurcated as it’s been in years.
All we mean by this is that depending on what group a stock is in, it could be in a nice uptrend, but it could also be in an ugly downtrend. Stocks and other risk assets are literally moving in opposite directions these days, and doing so with some serious momentum.
At the index level, you can see this split market reflected by trendless ranges.
When we look to our risk-appetite ratios and indicators for information, we’re not getting much as the vast majority are still stuck in the same ranges they’ve been in for the better part of 12-months.
So, risk assets are a mess and most of our risk indicators are also a mess. Makes sense, right?
Let’s take a look at some of them now:
Long story short, there is really nothing new to report about these relationships. They started going sideways early last year, and they are still going sideways today.
There is no directional signal here. Instead, these charts are confirming what we’re already seeing from stocks.
The bias is neutral. Most indexes are trendless. Individual stocks are mixed.
Whether we’re looking at our in-house risk-on/risk-off ratio, high beta vs low volatility stocks, copper vs gold, or the Aussie/Yen they’re all just consolidating in ranges. The three ratios in the lower panes are from the currency market, commodity market, and stock market, respectively. But regardless of which asset class we're analyzing, they're all telling us the same sideways story.
The next important piece of information will come when we finally start to see some resolutions from these charts. They are all likely to move in the same direction once they finally choose which way that’s going to be.
But for now, these trends are supportive of the rangebound action we continue to see from so many risk assets. Sure, certain cyclical indexes and commodities have resolved higher while many international and growth-heavy indexes have broken lower. But, on balance, things remain a mess.
The following chart of the Global Dow Index and Copper is an excellent example of this:
Copper is a great barometer for the commodities market and the Global Dow does as good a job as anything when it comes to representing the overall equity market.
And just like the ratios above, we’re looking at prolonged consolidations within the context of structural uptrends.
Again, this is not the case for everything but it is the story for most things.
When will these charts finally choose a direction? Who knows! It could be next week, or it could be next year. The only way we’ll know for sure is when we start to see a growing list of resolutions either up, or down.
When we weigh the evidence from risk assets on an absolute basis, things are split right down the middle between the bulls and bears. Copper and the Global Dow tell this story well as the former is threatening to resolve higher while the latter is challenging the lower boundaries of its range. This is precisely what we mean when we say the evidence is “split.”
Our risk checklist also reflects this messiness, as the reading is still wallowing around the same level it was last summer.
Here’s an updated look.
We’re currently at a reading of 32% which is at the lower end of the range it's fluctuated in since we introduced the list last year. While most of our checklist assets and ratios are below our risk levels, considering the selling pressure in recent months, the list is actually holding up quite well.
The bottom line is until we see this checklist swing in one direction or another, we’re going to be stuck with this messy market. And the only way that's going to happen is if we get some resolutions.
The next important piece of information is going to come to us only when we start to see a growing number of charts break higher or lower from their ranges. As long as so many of our risk appetite ratios are stuck chopping sideways, there's going to be nothing new to report.
While this has felt like watching paint dry for almost a year now, it's important we keep monitoring these charts because whichever direction they finally resolve in will be a valuable heads-up for the future path of stocks and other risk assets.
Let us know what you think, and, as always, reach out with any questions.
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