Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Markets Continue to Flirt With Risk-on Signals

Published 03/07/2023, 09:36 PM
Updated 07/09/2023, 06:31 PM

There’s no shortage of threats lurking, ranging from inflation, elevated interest rates that may go higher still, and various geopolitical threats. But market sentiment has improved recently, climbing a wall of worry and suggesting that investors are presuming that the worst has passed for the world economy, based on various ETF pairs through yesterday’s close (Mar. 6).

Consider the ratio between high beta US stocks (NYSE:SPHB) and their counterpart via low-volatility shares (NYSE:SPLV). This measure of appetite for risk has shot higher recently and is holding near the highest level in a year.

U.S. High Beta Stocks Vs. Low Volume Stocks

Despite the headwinds for housing, shares in the industry are also pricing in higher odds that the sector has turned a corner. Homebuilding stocks (NYSE:XHB) vs. US Treasuries (NASDAQ:IEF) have rebounded to levels that prevailed before last year’s sharp correction took the wind out of the bull market.

U.S. Homebuilders - Treasuries Comparison

The homebuilder recovery relative to the US stock market (NYSE:SPY) overall is less pronounced, but it’s still hard to miss the bounce of late.

U.S. Homebuilders - Stocks Comparison

There are also signs of improving sentiment on a global basis, based on a pair of asset allocation funds.

Aggressive Vs. Conservative Capital Allocation

A sharp recovery in semiconductor stocks via SMH (a proxy for business-cycle expectations) relative to US shares (SPY) also hints at better days ahead.

Semiconductor Stocks Vs. U.S. Stocks

The copper-gold trend has improved, too. The assumption here is that the price of copper (NYSE:CPER) is a leading indicator for economic activity and so to the extent that it outperforms gold (NYSE:GLD), a safe haven, it’s a sign that expectations are improving.

Copper-Gold Ratio

Finally, the ratio of US stocks (SPY) vs. US bonds (NASDAQ:BND) continues to hold well above its recent low, which suggests that the risk appetite has improved significantly after taking a beating last year.

Stocks - Bonds Ratio

The question is whether the recovery in sentiment is more than a bounce off of extreme bearish conditions or the start of new bull market? Until several of the ratios above break decisively higher and hold above previous highs, it’s premature to assume that the aftershocks of 2022 are ancient history and that something better than a trading range awaits in the near term.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.