Seeking Alpha

These 9 Charts Speak To Risk Appetite

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Includes: AGG, DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, GOVT, HUSV, IEF, IVV, IWL, IWM, IYT, JHML, JKD, KBE, LQD, OTPIX, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWM, RYARX, RYRSX, SCAP, SCHX, SDOW, SDS, SH, SMLL, SPDN, SPLV, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TLT, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, UWM, VFINX, VOO, VTWO, VV, XLF, XLK, XLP
by: Chris Ciovacco
Chris Ciovacco
Multiple asset class via ETFs, proprietary market model, rules based system, Long, special situation short
Summary

The market has been providing bullish and non-recessionary clues since mid-January.

Numerous charts and ratios have made incremental steps back toward "risk-on".

Numerous signals have been triggered in the last 30 days.

Baby Steps Away From Fear

Despite very little hard evidence that a recession was imminent, market participants have been highly risk-averse in recent months. While many of the charts below still have hurdles to clear, some incremental steps were recently taken away from the Armageddon narrative. Banks are trying to break out from a range that has been in place since February. The Bank ETF (KBE) printed a new multi-month high Monday.

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The Dow Jones Transportation Average (IYT) still has some work to do, but it has taken incremental steps and recently printed a multi-month high.

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Tech stocks (XLK) relative to consumer staples (XLP) cleared a trendline that acted as resistance in April, July, and October.

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Financial stocks (XLF) also made some “risk-on” progress relative to more defensive-oriented bonds (IEF).

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A similar “maybe the world is going to stay on its axis” look can be found on the chart showing the performance of the S&P 500 (SPY) relative to bonds.

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The trade war contributed to increasing conviction to own lower-volatility sectors (SPLV). With trade rhetoric having moved into the “toned down” camp in recent weeks, the broader market has made some relative progress.

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Monday’s session also featured the S&P 500/corporate bond (LQD) ratio clearing a trendline that had rejected risk-seekers in May, July, and October.

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Rare Long-Term Signals Triggered Around The Globe

Do longer-term setups tell us there is a realistic possibility of stocks continuing to march higher over the next one to five years? You can decide after reviewing the facts in this week’s video.

Longer-Term Looks

Treasury bonds (GOVT) turned down relative to the S&P 500 at important turning points for stocks in 2012, 2016, and 2018; the S&P 500 is shown at the bottom of the chart below as a “risk-on” reference point. The current look of the chart says good things could still happen for stocks (VOO) relative to bonds (AGG).

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The same concepts apply from a much longer-term perspective when viewing the stock/bond (TLT) ratio below. The ratio is trying to make a stand near an area that could act as major support and as a potential launching point for stocks relative to bonds.

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The Market And Economy Have Been Providing Factual Clues Since January

The “be open to bullish outcomes” message is not particularly new. In fact, the blurb below comes from a Short Takes posted dated January 21, 2019:

In last week’s CCM stock market video, we noted the slope of the S&P 500’s 200-day moving average told us to keep an open mind about better than expected outcomes in the days, weeks, and months ahead. A recent development on the breadth front also falls into that bullish-open-mind category.

While it is never easy navigating near a major low (December 2018), the market has provided numerous “this does not look like a bear market” and “this does not look like a recession is underway” clues since the rare breadth thrust that was covered on January 21:

This Never Happened In The 1974, 2001, And 2008 Bear Markets

Rare Bullish Shift In P&F Buy Signals

History Says Stocks Could Rocket Higher Over The Next Two Years

Volatility Is A Normal Part Of All Trends

As outlined in the posts above dated between January 21 and November 4, the market and economy have provided numerous reasons to keep an open mind about better than expected outcomes. Now that stocks are near an all-time high, it can be easy to forget all the volatility that took place between those two dates. The moral of the story is even IF really good things happen in the weeks, months, and years ahead, we can expect a ton of volatility and scary headlines along the way. We will continue to take it day by day with an open mind about all outcomes, from wildly bullish to wildly bearish.

Disclosure: I am/we are long VOO, XLK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.