The 'Risk On' Trade Is Back

Includes: GLD, SPY, TLT
by: WMA, LLC

An S&P 500 break-out suggest risk on.

Gold and Bond indexes rolling over in relative terms suggests risk-off is over, for now.

Trade war and tweets implies risk-on trades remain.

So it just took the scheduling of new trade talks by deputy trade representatives to send equity indexes back towards record highs. We doubt that any thoughtful institutional investor can into his/her office Thursday morning saying, “lets buy equities with two hands on this trade war development”. Who really believes that the umpteenth meeting between U.S. and Chinese trade reps is worth a +450 point jump in the Dow? Astute market observers recognize that Thursday’s big move in equities was due to a break higher in the S&P 500, out of the volatility box in which the index had been trading for 4-weeks. When no one understands anymore what is really important in the economy or on financial markets, folks just trade chart patterns. And that, in sum, explains the gains in equities this week and our investment thesis in this article -- markets have returned to the risk-on trade.

It Was The Volatility Box, Stupid

Throughout August, U.S. equity indexes were up one day on positive statements out of China, then down the next day on a Trump tweet. All these circumstantial headlines just fueled meaningless moves between 2830 and 2940 on the S&P 500. The consolidation (or volatility) box in which the S&P 500 had been trading became so evident to everyone, that once one of the boundaries was broken, everyone holding back trades was set rush in together. And last week the S&P 500 finally took a direction.

As shown in the S&P 500 daily chart below, the index had been consolidating below its 50-day moving average (in green) and within this volatility box. In August, 60% of the trading days saw an over +/- 1% move in the S&P 500, within this box. The explosion higher on Thursday (green arrow), signals that the risk-on trade is likely back on.

Risk Indicators Back To Risk-On

Looking back at August, not much really changed for the economy. Yes, the 10-year/2-year yield curve inverted briefly a couple days in August. However, the recent dip of 2-year rates below 10’s did not add up to many basis points more than the near-inversion seen last December. And the trade war escalation with Trump’s new tariffs on Chinese goods announced at the beginning of August was just another joust (before pull-back) in this on-going saga. Unsurprisingly, our U.S. Risk Indicator did not detect much of a risk-off trade in August. The indicator dropped into risk-off mode for only one-week in August, and the first reading for September puts the indicator solidly back into risk-on territory.

Interestingly, by comparison, the European Market Risk Indicator has detected much less risk-taking behavior this year on European financial markets. U.S. equities have remained the only game in town. An explanation of the components in these risk indicators can be found here.

Risk-Off Trades Petered Out This Week

Bonds and gold, which both began rising at the end of May, exploded even higher in August. We were told that the trade war between the U.S. was bad for companies and consumers and that the 10-year/2-year yield curve inversion was bad for the economy. This made sense and we collectively believed it. Bonds and gold became the assets to buy. The risk-off trade gained in popularity as investors bought into the fear narrative.

But the risk-off trade got crowded (which paradoxically made these risk-off trades risky). Gold (GLD) rose +10.3% in August and +21% since May. Bonds (TLT) rose +13% in August and +18% since May. Once *everyone* gets into safe assets, the assets are no longer safe.

As market swung from risk-off to risk-on trades this past week, we saw the relative strength of gold and bonds versus equities hit (potentially) sharp inflection points.

We will not opine how long gold and Treasurys will underperform relative to the S&P 500 in these charts, but for the near-term, it looks to be back to risk-on.

Fear Not September

We have all heard about how August and September are the worst months for stocks. However, in this bull market dating from 2009, seasonal patterns are not just not relevant. Ask anyone who followed “Sell in May” over the past 10 years!

Here are the numbers for September S&P 500 monthly performance and September to year-end performance since 2009.

September monthly performance

September to Year-End


































Percent Bullish



We’ve only had two bad months of September, and with the exception of last year, buying U.S. equities at the end of August has always been a profitable trade come New Years. Odds are not in favor of seeing the end of the bull market this year. Just on a pure statistical basis, we would bet on the 90% of cases when September to year-end is positive for equities. Seasonality is risk-on.

Trade War. And So What?

This U.S.-China trade war, if nothing else, has given volatility-hungry traders something to sink their teeth into. Should investors protect their portfolios and implement risk-off trades to protect their portfolios from the fall-out from the trade war? Absolutely not. When we look back at 2019, investors will classify the trade war in the same category as Brexit and the North Korea crisis. A bit of angst for nothing.

As we see it, there are only two possible outcomes for the trade war. The first, and most likely, is that an election-minded Donald Trump settles for an agreement à minima, as his slim chances of reelection depend on the economy accelerating into November 2020. The U.S.-China trade agreement will be an almost worthless barrel of pork, but Trump will put lipstick on this pig and sell it to the public as a “great victory for America”. The second possibility is that the trade war drags on to the U.S. presidential election because China understands that they don’t need to concede anything. Trump will scale back tariffs to minimize the negative fall-out for manufacturing and increase his odds of getting re-elected. The economy will sputter (1% to 2% GDP growth) into the election. In this scenario, there will be a new Democratic president who bends over for the Chinese and U.S.-China trade will be business as usual.

Bottom line: it is not the trade war that will drag the U.S. economy into recession. Equity markets have taken shots from trade war headlines and continue to bounce back. A politically-made problem will find a political solution, once the interests of politicians are aligned. Trade war is risk-on

Tweet Twit

So we know that President Trump likes to tweet. And he is not too politically savvy with his tweets (refer to the Jay Powell is an enemy of the U.S. tweet, or the order for all U.S. companies to leave China). In fact, his tweets are so off-the-wall, we are wondering why the market even reacts. Our thinking here is that the market is getting “de-sensitivized” to Trump’s tweets. People are seeing that they mean nothing and just create buying opportunities. Hence fewer traders will be selling to give their peers a trading opportunity to buy. Don’t be a tweet twit and sell on a Trump tweet. Tweets are now risk-on.


In this unusual environment with negative interest rates around the world and central banks stepping in systematically to support financial markets, it is not hard to understand why the risk-on trade is never far away. The U.S. equity market technical break-out confirms that angst over yield, trade wars, and tweets are not enough to keep risk assets down. Time to get back to buying risk assets .

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.