From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
It's beginning to feel more and more like a risk-on environment out there.
Commodities are ripping higher. Stocks are digging in at critical levels. And defensive assets such as Treasury bonds and the Japanese yen are in freefall.
Despite the market volatility this year, investors continue to be rewarded for buying stocks over bonds. This has been the case for two years now, and there's no evidence it will change anytime soon.
When we look to our risk indicators and risk appetite ratios, the majority are still stuck in a range. With the stocks versus bonds ratio resolving to fresh highs, we're thinking the rest may soon follow.
But first and foremost, the price action from this classic intermarket relationship suggests that stocks are still the place to be.
Let’s take a look.
Here’s a chart of the S&P 500 $SPY versus US T-Bond ETF $TLT:
What this ratio really tells us is where the alpha is between these two major asset classes.
When the line is rising, stocks are outperforming and offering better investment opportunities than bonds. This is the situation today.
When the line is catching lower, bonds are assuming leadership as an asset class. This also speaks to risk aversion and defensive positioning by investors. In these environments, we’re best served buying bonds.
With the ratio currently resolving higher, in the direction of a strong primary uptrend, we want to continue to lean on the equity market for long exposure.
It’s true that many stocks have gone nowhere during the past 12-months. In some cases, they’ve been absolutely crushed.
This was also the case with the SPY/TLT ratio, as it's been range-bound since early last year.
A valid upside resolution in this relationship supports higher prices for risk assets and suggests the recent selling pressure could be coming to an end for the weakest stocks.
Even if it doesn't, there are still plenty of opportunities in the names that have been showing relative strength. Those are the ones we want to be buying anyway.
As for risk appetite, things are still mixed.
With that said, these new highs in SPY/TLT mark a big step in the right direction. Whether our other risk indicators will soon follow or not, we'll just have to wait and see.
In the meantime, one thing that remains clear is that we still want to be buying stocks and selling bonds.
Countdown to FOMC
Following the Federal Reserve's recent rate hike, the market is pricing in a 50-basis-point hike at the May meeting.
Here are the target rate probabilities based on fed funds futures:
