Not all RS Charts are created equal. The recent pullback has seen a handful of changes favoring risk-off names.... but do you need to take action before the close of the year?
Recent action has left many technical developments worth watching… leaving even us chartists trying to decipher what is noise and what is not. Today’s report will discuss a notable risk-off development and what that means for markets as we move into December- and whether the move marks need for a shift in your allocation to close out 2025.
While there is a virtually endless number of possible relative strength (RS) combinations available to you at any point in time, there are some that stick out more than others. When it comes to sector strength, the majority of the NDW analyst team will reference a 3.25% RS chart between broad staples fund XLP & discretionary fund XLY. Zooming out of the pure one-to-one relationship, understanding who wins this RS arm wrestling contest can provide insight into broader market themes in play. Speaking plainly, discretionary names in control suggest a more risk-on tone in the market, while a preference for staples dictates that more risk-off options may be gaining favor. With the start of November’s decline, we saw this RS relationship move back into X’s in favor of XLP, suggesting a near 10% performance swing in favor of staples (3.25% per box, three boxes needed to reverse.) There is a bull and bear case here- bulls would point to the string of RS sell signals suggesting XLY retains long-term strength… and bears would say that every new trend starts with a 3-box reversal. There is an argument for both, but there does seem to be a bit more convincing of a picture for the bulls. After all, a portfolio following every reversal for this specific chart hasn’t been additive vs. a pure buy and hold of either fund since 1999. Signal switching on the other hand, has. All this to say, those investors concerned only with the long-term RS signal would still own the risk on representative XLY.
There is evidence to suggest that the preference is risk-on littered throughout the platform. Domestic equities retain their first position on the DALI page, headed by the likes of technology, comm. services, etc at the top of the intra sector rankings. The asset class group scores page sees consumer staples at the bottom of the heap and the only sector that ranks below cash. While the spread between staples and discretionary has certainly dropped to start November, the long-term picture is quite clear: risker sectors remain in control.
All this to say, remember to prioritize long-term strength when looking at trends around the platform. Today’s report isn’t to say that it won’t be important to watch how these risk-off changes develop as we close 2025 (as they certainly will be…) but none of the changes we have seen dictate you take a major shift ahead of your year-end client reviews. For any questions, remember to continue to read the daily report and set alerts on key relationships to be automatically notified of any changes.
