The Global Risk-On Shift: Are We Witnessing A Systemic Event

Commenting on today’s trading with a focus on the surge in Risk-on shift investor behavior, Gorilla Trades strategist Ken Berman said:

Global Risk-On Shift

Alexas_Fotos / Pixabay

Today’s session was very similar to Monday’s one, as the major indices were mixed but there were positive developments ‘under-the-hood’. Small-caps had yet another blowout session, as they surged higher together with Treasury yields, and since the Volatility Index (VIX) continues to confirm the risk-on rally, the outlook remains bright for bulls.

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Q2 hedge fund letters, conference, scoops etc

The major indices finished little changed for the second day in a row, but the Dow extended its winning streak to six days thanks to global rally in risk assets. The Dow was up 74 or 0.3%, to 26,909, the Nasdaq lost 3, or 0.04%, to 8,084, while the S&P 500 rose by 1, or 0.03%, to 2,979. Advancing issues outnumbered advancing issues by an almost 2-to-1 ratio on the NYSE, where volume was well above average.

Apple in focus

The key risk-on sectors diverged substantially today, and even within the sectors, the performance of the various industries differed by more-than-usual. Energy-related stocks boosted the market-leading materials sector, even as precious metals continued to lose ground, in line with the global risk-on shift, while industrials and large-cap banks were also relatively strong. Consumer goods, the stats of the past couple of months trod water, while tech stocks and services edged lower, despite Apple’s (AAPL) post-iPhone-launch rally.

The past couple of days saw a surprising shift in capital flows on Wall Street. A lot of the previously leading stocks from a wide range of sectors, such as McDonald’s (MCD), Visa (V), Netflix (NFLX), and Nike (NKE), lost ground together with some of the main safe-haven assets, while the recently lagging small-caps and large-cap banks outperforming the broader market. Although some of these trends make sense, in light of the global risk-on shift, the extent of the moves suggests that we are witnessing a systemic event that’s exaggerated by the increased trading activity of September.

The price of oil had a highly volatile session, as even the crucial commodity rallied in early trading, thanks to Iran’s commitment to cut its output, the news that National Security Advisor John Bolton has been fired by President Trump caused a dip in its price. Mr. Bolton is considered a foreign policy ‘hawk’, and his departure makes a peaceful resolution to the conflict with Iran more likely. Oil finished the session on a positive note, thanks to the upbeat investor sentiment, and the energy sector could continue to lead the way higher in the coming weeks.

Risk-On Shift Ahead Of PPI

While the last two sessions of the week will be the busiest, in terms of economic releases, traders could be in for already be in for an active day tomorrow. The Producer Price Index (PPI), wholesale inventories, and the weekly crude oil inventories will all be out in the morning, and the inflation measure could be the most important for investors. Analysts expect a bounce to 0.2% in the core PPI, following the first negative reading since January, which could confirm the early improvements in the struggling manufacturing sector.

Technical Corner

The technical picture remains clearly bullish on Wall Street, and since small-caps have also joined the party, the outlook for the major indices even got better, despite the two days of choppy trading.  The benchmarks are all well above their 200-day moving averages of 7,632 for the Nasdaq, 2,813 for the S&P 500, and 25,669 for the Dow, and they also remain above their 50-day moving averages of 2,948 for the S&P 500, 8,056 for the Nasdaq, and 26,580 for the Dow.

From a technical perspective, the rally in small-caps is the most important development of the week, so far, as the Russell 2000 hit a five-week high outperforming its large-cap peers. The index has been lagging the broader market for several months, and it’s still more than 10% below its all-time high, despite the recovery of the past couple of weeks. Thanks to this week’s move, the Russell is now back above both its 50- and 20-day moving averages, for the first time since late-July, and should it remain relatively strong, the major indices could soon hit new all-time highs. Stay tuned!




About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Prior to ValueWalk, Jacob was VP of Business Development at SumZero. Prior to SumZero, Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver