We use today's feature as an opportunity to keep tabs on several key risk-on/risk-off relationships.
Change is exciting. Subtle progress is not. While changes in leadership can be psychologically thrilling to watch (or read about for that matter,) consistent trends are the most productive environment for momentum focused strategies and will often be the “best” for your portfolio. With that in mind, today’s feature will discuss a handful of recent developments that confirm a critical relationship within all of our investment strategies, the market’s risk-on vs. risk off posture as we move into August. From a performance perspective, it would be easy to assume that because markets are at all-time highs, risk-on assets must be in control. While this ultimately is the case in our current market environment, risk-off assets can certainly have their time in the sun during strong markets. Just as recently as Q1 or this year, defensive-minded staples XLP outperformed more offensive sectors like XLY & XLK. All this to say, understanding why markets are moving higher is a key at any one point in time.
We know that offensive oriented names have been at the forefront of the recent rally. To confirm this, we can unpack a handful of relative strength (RS) developments that have occurred over the last week, both for consumer discretionary sector representative XLY. The fund reversed into X’s on a 6.5% RS chart against both consumer staples fund XLP and cash proxy MNYMKT. While it is worth nothing that neither of these specific charts are additive from a pure reversal switching standpoint, they do act as confirmation of more consistent scales, namely the 3.25% RS scale between all aforementioned representatives. Point being, consumer discretionary representatives continue to notch relative strength wins against more defensive areas of the market.
This is also evident when looking at these groups in general. The chart below details the “average” consumer staples (red) & consumer discretionary (blue) fund on the asset class group scores page. Since crossing back above the staples group to open May, the spread between the two has only widened… again signaling continued strength from discretionary options.
What about against the rest of the sectors? Below we have run a 3.25% relative strength matrix between 20 focused sector funds (11 cap weighted and 9 equal weighted.) Themes here are largely similar. While consumer discretionary options are towards the upper-middle of the matrix, other risk-on options (technology, communication services, industrials) remain littered towards the top of the matrix. Meanwhile, more risk adverse options (staples, traditionally defensive utilities) lay towards the bottom. Broader participation metrics also signal as such. (^BPECCONCYC) & (^BPECTECH) suggest more consumer cyclical & technology stocks lie on PnF buy signals than staples names. The difference in participation isn’t anything to write home about, but again… adds to the picture.
Of course, it isn’t completely realistic to completely avoid risk-off names, especially for those clients that can’t stomach some of the wilder swings offensive sectors can bring. Whether you are looking to pick strong stocks in strong sectors (risk-on) or simply trying to focus on points of technical leadership within weaker areas (risk-off) the platform has several areas you could look towards. The buy lists break down stocks and funds into various sectors (across large, mid, small & yield focused lists) to give you options in any desired sector. For example, a client that might need exposure to defensive consumer staples names could focus on one of the 14 technically strong options flagged on the buy list.
Remember- keeping tabs on strength may not be as exciting as catching the newest trend… but is mission critical when it comes to staying on top of relative strength within your portfolio. Take today’s feature as a crash course of how to stay up to date with said strength. Use identified key relative strength relationships & matrices, broader asset allocation tools, and ultimately NDW’s stock/fund selection tools to stay ahead of the curve as we move into August.
