Many pundits are now saying it’s Risk On again. I take exception to this. First the economic data from the US, the EU, and China has indicated decelerating growth. The Fed has substantiated this. This means growth will be less than expected. It means downward revisions are coming. This would tend to make one think Risk Off.
More than this the major currencies that can be used for carry trades are not positive for a carry trade that would benefit US stocks. Currently the USD is weakening against both the Yen and the Euro. This means that if you borrow either of these to invest in something else, you could still lose money. If the Yen and Euro are both strengthening, you would likely have to pay back more when pay the money back. In other words the risk trade would be too risky.
If the USD is going down, you might not want to invest in US equities because they would effectively be going downward in foreign currency terms. Since the Fed has indicated that it wants more inflation, it will likely act to weaken the USD. This should scare foreign investors away as long as they think the USD direction is downward. Plus in the near term, the US equities markets are highly over bought. They are due for a retracement. This too should scare investors (even US investors) away until a reasonable retracement has occurred.
Naturally this situation is in perpetual flux. Still it would seem for the near term that it is “Risk Off” rather than “Risk On”. The singing by some that high flying tech stocks are "trading like it's 1999" (the dot com bubble) is a further indicator that there is significant reason to worry. The failure of major DJIA tech stocks to move up significantly with the high flying techs is further evidence that the "tech rally" is more of an HFT mediated short squeeze of highly shorted, over priced, over bought high flying tech stocks than a real tech rally. The major tech stocks (ex. INTC, CSCO, HPQ, MSFT) are normally not shorted appreciably. They have huge market capitalizations. Therefore they are much harder for HFT traders to manipulate upward. They are a good indicator if you are trying to determine the veracity of a purported "tech rally". This one appears to be "fake". Highly shorted, over bought, over priced techs such as BIDU, CRM, OPEN, NFLX all seem likely to fall from their HFT short squeeze induced highs. Financial sector stocks do not seem likely to take up the slack with the re-emergence of the EU credit crisis (Ireland this time), and the big worries about the real estate market. Risk Off.
Disclosure: I am short CRM and NFLX.