From the vantage of the past week of trading the case looks clear for calling recent market volatility a sign of a risk-off pivot. But if your time horizon is longer, there’s still room for debate, based on a set of ETF pairs for gauging the broad trend via prices through Aug. 7.
From the vantage of two global asset allocation ETFs, the bull trend has suffered a setback, but it’s not yet clear if this is short-term noise or a longer-term signal. The ratio of aggressive allocation (AOA) vs. conservative allocation (AOK) fell sharply in recent days, but the ratio’s 50-day average remains well above its 200-day counterpart.
Further deterioration for this ratio would put the bulls on the defensive in a more convincing degree, but at the moment there’s still a plausible, if battered, case for reserving judgment.
A similar profile applies to US stocks, based on the trend for a broad market proxy (SPY), vs. a low-volatility portfolio of American equities (USMV).
Ditto for the high-flying corner of semiconductor stocks relative to US shares overall (SPY (NYSE:SPY)).
For another perspective on deciding if market sentiment has genuinely shifted, consider how the defensive utilities sector (XLU) compares against stocks overall (SPY).
This ratio tends to rise when a safe-haven bias dominates. Although there’s been movement toward that shift, it’s not yet clear that an enduring change is underway.
On the other hand, the ratio of medium-term Treasuries (IEF) vs. shorter-term counterparts (SHY) is more advanced in signaling a change in sentiment. To the extent this ratio is trending higher, it’s a sign that the appetite for longer maturities is rising, which tends to equate with higher confidence that the “going long” trade will be profitable, fueled by expectations for macro-related troubles ahead. On that score, the latest upturn in IEF:SHY ratio deserves close attention.
On a related note, keep an eye on the US stock-bond ratio (SPY:BND). This gauge of risk-on/risk-off sentiment has crashed in recent days on a daily basis, which is a warning sign. But for the moment the trend has only wobbled in terms of the 50-day/200-day averages. If the longer-term metric begins stumbling in the days and weeks ahead, it may be a more persuasive answer to the question we posed in early July: “Has Risk-On Run Out Of Road?”