A Risk Appetite Assessment

The S&P 500, Dow Jones Industrial Average, and Nasdaq are each within a few percent of their all-time highs, yet for the last 6 months, stocks have struggled to break through overhead resistance with any conviction. The Cumulative Advance/Decline Line indicates that breadth is at least adequate, and sentiment readings are far from stretched, but still, prices remain largely stagnant. One problem could be a lack of risk appetite. Strong equity uptrends are generally a reflection of increased risk-taking from investors, and ratio analysis is a great tool for gauging the appetite in the current environment.

The debate over Growth and Value has dominated the investment landscape for decades. Growth stocks certainly led the way higher during the dot com rally of the late 1990s, but then led on the downside as the bubble popped. The tendency of Growth to outperform during uptrends has been apparent in recent years as well.

Growth vs Value

The ratio of S&P 500 Growth to S&P 500 Value rallied from 2013-2015 as stocks broadly advanced, but then declined from late 2015-2016, a period where equity markets struggled to set new highs. Growth bottomed relative to Value at the end of 2016, and stocks soared in 2017. The ratio climbed all the way through the Dot Com high of 1.57, but then stalled at the 261.8% retracement from the 2015-2016 decline. The August decline confirmed a bearish RSI momentum divergence and got to its most oversold level since 2016.

In short, this multi-year trend of Growth outperformance is on life-support. The ratio needs to work off its momentum problems and recover the 2000 highs, or this false breakout could be just the start of Value’s strength.

Other flavors of domestic equities are showing a lack of risk appetite as well. Simply comparing the Consumer Discretionary sector to Consumer Staples yields similar results to those above. This ratio is great because it just makes sense: the numerator is the equivalent of buying a new car, and the denominator is buying toothpaste – people are only doing the first when times are good.Discretionary vs Staples.PNG

Like Growth/Value, Discretionary/Staples made it all the way back to 2000 highs in 2018. But the ratio put in a bearish momentum divergence in the third quarter of that year and has struggled ever since. Momentum is stuck in a bearish range, and the current ratio is below its 200D moving average. While clearly not in an uptrend, we’ll have to see a break of last year’s lows to get more negative on this relationship.

Small cap stocks relative to large caps have moved sideways for much of the last 5 years. A strong 2016 was followed by weakness in 2017, but the period since mid-2018 has been especially weak. Small vs Large

Momentum, too, has been decidedly negative since March, and not even a sharp September rally could break the ratio’s downtrend. Support from the 2007-2009 lows, just above 0.50, is a logical place to try and find a bottom, but for now the trend is down.

Looking abroad, the ratio of Emerging to Domestic markets is another great measure of risk-appetite, and it’s sending a similar message. The false breakdown in early 2016 was a near-perfect indicator of the bottom in U.S. equities, and four years later we’re back to the same key level. The 2019 downtrend is very much intact, and momentum has been stuck in a bearish range for most of the year. Technicians argue that the more times a level is tested, the more likely it is to break. This is the fifth (sixth?) attempt to get through 0.70 – a breakdown here would be point towards further risk aversion by investors.

Emerging vs Domestic

On the other hand, momentum diverged positively at both the July and August lows, and has yet to get oversold during the September decline. We’ll want to see a bounce and break of the most recent swing high to confirm the divergence, but a bounce off of multi-year support might make some sense.

Risk aversion hasn’t been limited to equities either. The bond market is significantly larger, and investors have favored Investment Grade Corporate Bonds over their riskier counterparts since the fall of 2018.

High Yield vs Corporate

High Yield bonds took the brunt of the 2015-2016 decline in stocks, but then ripped higher over the next three years. When stocks began to fall again in October of last year, High Yield began to to underperform, too. In August, the ratio fell below the 2014 swing high – a sign of more bad things to come. But buyers came to the rescue and pushed the group back above the key support level. Momentum even managed to get overbought on the recent rally, but the ratio has more work to do. It’s still below a downward sloping 200D moving average and the downtrend line from the highs. The false breakdown might have been the key turning point, but we’ll need to see more bullish evidence before calling this a broken downtrend.

For stocks to move higher, we’ll probably need to see more appetite for risk in the markets. The safety trades have clearly been in control, but several of the relationships above could be at bullish turning points. More concerning would be a loss of leadership from Growth stocks, which had managed to lead even as the other ratios faltered. However things resolve, the next few weeks should be fun to watch.

Nothing in this post or on this site is intended as a recommendation or an offer to buy or sell securities. Posts are meant for informational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in posts. Please see my Disclosure page for more information.

King Dollar

The U.S. Dollar is the largest reserve currency in the world. The U.S. economy represents about a quarter of the globe’s GDP, yet the Dollar’s share of official foreign reserves is more than double that amount. Strength and weakness in the USD has both obvious and more obscure impacts on economic activity, no matter where you reside.

The DXY, a basket of currencies measured relative to the USD, has largely gone nowhere since a marked rally in 2014. The 38.2% and 61.8% retracements from the 2001 – 2008 decline have acted as support and resistance, and now prices are approaching the upper end of the channel once again. With a flat 200-week moving average, there’s not much of a long-term trend here, but another break above $100 could be enough Dollar strength to start looking at the 2001 highs near $121.


The Euro cross comprises nearly half of the DXY, so it’s no big surprise that the two look so similar over the shorter term (with one of the two charts inverted, of course). The EUR has been rangebound vs. the USD for 5 years. The 38.2% retracement from the 2008-2016 decline has been a key rotational area for a decade, and held as resistance again last year. Though the EUR is approaching multi-year lows and the short-term trend is down, the trend hasn’t been all that strong – daily momentum hasn’t even gotten oversold in the last 12 months. This exchange rate is stuck in the range until it isn’t.EUR.PNG

Amid the political turmoil surrounding Brexit, the British Pound has been relatively weaker. The mid-2016 vote to leave the European Union pushed the cross below the 2010 swing low, a level that held as resistance in early 2018. Now, the exchange rate is threatening to set fresh lows.


The Japanese Yen, on the other hand, is trying to set fresh highs against the USD. The Asian currency rallied from 2007-2011, before weakening back to 124 Yen per Dollar in 2015. The 61.8% retracement at from those major moves (near 105) has acted as chart support for the last 3 years, but any further weakness from the Dollar would push the cross through that level and towards rotational support near 100.JPY.PNG

Once we get past the major crosses, though, things get a little more interesting. The Trade Weighted Dollar Index, with its reduced Euro exposure, is setting 20-year highs. The strength is most apparent against emerging markets

Trade Weighted Dollar

The Chinese Remninbi has broken through the former resistance area at 7.0, and is now at the weakest level since 2008. The 138.2% extension from the 2017-2018 move is a logical stopping point over the near-term, but anything is possible in a currency controlled by the state.


The Brazilian Real is near its weakest level of the twenty-first century. The cross has consolidated for almost 5 years after the 2011-2015 rally, and with weekly momentum in a bullish range, could easily weaken further. The 138.2% extension from the entire 20-year range lies just under 5.0. That area could act as resistance if the chart weakens past the 2018 highs.


In countries like Argentina and Turkey, the relative strength of the Dollar is more pronounced and troublesome. Debt in these countries is often denominated in USD, and it becomes more difficult to pay back when revenues in the local currency are worth less and less over time.

Strength in the U.S. Dollar has made it more difficult for U.S. investors to make money overseas, too. European indexes have, on balance, performed similarly to domestic equities over the past 12-months. As you can see below, however, the currency translation has negatively impacted performance by more than 5%. The problem is obviously worse in some of the emerging market currencies mentioned above, whose relative performance has been substantially worse than that of the rangebound Euro.

Equity Derby.PNG

As the globe’s primary reserve currency approaches key levels in several key crosses, it will pay to keep in mind the potential effects on both emerging market credit and equity performance.

Nothing in this post or on this site is intended as a recommendation or an offer to buy or sell securities. Posts are meant for informational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in posts. Please see my Disclosure page for more information.