Flirting With Trouble
As risk appetite takes a breather, the bull market is close to mis-behaving
We will get to the latest update to our Systematic Asset Allocation portfolios in just a moment, but I want to lead with this: While the Risk On Environment persists, we are seeing a reset in Risk Appetite. Our Risk On / Risk Off Indicator is flirting with breaking down. While fissures like this can repair themselves (and often do within bull markets), chasms begin as cracks and so when cracks emerge, we need to pay more attention.
We can also see these cracks also when we look at our Quiet Strength Indicator. Bull markets are often quiet (relatively small daily swings in the indexes) and strong (consistently producing more stocks making new highs than new lows). In recent weeks, quiet strength has ebbed.
It is important to note that the last two times this indicator flirted with a breakdown, we had a ongoing Breadth Thrust Regime to provide support. That regime expired in May and has not been renewed.
While we are seeing some fissures that are worth further exploration, it is important that from a trend perspective, strength persists. This is reflected in the latest update to our Systematic Portfolios. We are seeing shifts in relative leadership but little change from an absolute trend perspective.
Portfolio Applications update: Our latest update to the Systematic Asset Allocation portfolios is now available.
Key Takeaways: Commodities have reasserted their leadership versus equities. Within equities, the US continues to lose ground relative to the rest of the world, with large-cap growth being the most significant laggard. This can also be seen at the US sector level, as the Consumer Discretionary and Communication Services sectors contend with falling trends. The Financials sector has improved and the trend there is now rising.
The breakdown in our quiet strength indicator is partially due to more noise, but more acutely a symptom of a market that is struggling to produce more new highs than new lows.
