One of Wall Street’s famous maxims is that bull markets climb a wall of worry. In this respect, the real and potential dangers are not lacking. But as recent history suggests, the crowd isn’t intimidated, at least not yet. Quite the contrary, in fact, as investor sentiment seems to have been fueled in favor of buying, with various trend profiles in markets around the world indicating price strength that highlights risk positioning.
As an approach to profiling this behavior, the following review updates CapitalSpectator.com’s periodic review of price-momentum bias through ETF pairs. For reference, readers can compare the charts below with this June 26 article. Today’s data refresh uses prices through yesterday’s (July 17) close.
Once again, we start with the so-called high beta (i.e. high risk) stocks (SPHB) for the United States versus low volatility (low risk) stocks (SPLV), a indicator to gauge appetite for higher/lower risk positioning. in US stocks. As the chart below shows, this metric indicates a strong rebound in risk appetite.
The rally in homebuilder stocks (XHB) also signals strength as this cycle-sensitive sector continues to rally in absolute and relative terms against the US stock market (SPY).
Semiconductor stocks (SMH), which are seen as an indicator of risk appetite and the economic cycle, continue to perform strongly against stocks in general (SPY).
Meanwhile, the price bias that favors stocks (SPY) over bonds (BND) continues to remain hot.
The stimulus trade is fading, helping to fuel risk appetite. In particular, the trend that previously favored treasury inflation-linked bills (TIPS) over standard treasury bills (IEF) continues to decline after surging in 2022.
Finally, examining the crowd’s risk appetite from a global asset allocation perspective also points to a strong bullish market bias, based on the aggressive asset allocation ratio (AOA ) against its conservative counterpart (AOK) – an indicator that has hit a new high recently.
What could go wrong to derail favorable trends? Jeanna Smialek of the New York Times offers a useful summary today in an article that looks at how the Federal Reserve’s monetary policy might play out in the months ahead:
“There are still risks to the outlook, of course,” she writes. “The economy could still slow more sharply as the effects of rising interest rates add up, reducing growth and hiring.” Meanwhile, “inflation could come back with a vengeance due to an escalation of the war in Ukraine or another unexpected development, prompting central bankers to do more to ensure that price rises are quickly brought under control. . Or the price increases could just prove painfully stubborn.
For now, however, markets appear to be embedding a new virtuous cycle. Its duration is of course subject to debate… as always. But that doesn’t stop anyone from giving their opinion. For example, Ed Yardeni of Yardeni Research sees more potential for US equities:
“I think the market was kind of thrilled with a disinflationary soft landing scenario,” he said. recount CNBC Monday. “That seems to be what we find ourselves in. I have thought for some time that we are in a recession, but I have argued that this is an ongoing recession, not an economy-wide recession. Now I think we are in a gradual recovery. The “result,” he says, “is that we’ve been in a bull market since October 12.”
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