Risk-On Sentiment Persists For Global Strategies

Despite worrisome headlines, high valuations in some markets, and elevated policy uncertainty, the appetite for risk remains strong, according to a set of ETFs through Monday’s close (Oct. 20).

Echoing last month’s update, the trend is still positive for the ratio of two global asset allocation ETFs via an aggressive strategy (AOA) vs. its conservative counterpart (AOK). This indicator rose yesterday, trading just below a record high, signaling that demand for risk assets remains robust.

Risk-on signaling also looks strong for the US equity market, based on the ratio for a conventional measure of the US stock market (SPY) vs. a low-volatility (USMV) counterpart, which proxies as a relatively conservative strategy for holding US shares. While this indicator has pulled back modestly from a new high, the upside bias still looks solid.

A similar profile applies to US cyclical stocks (XLY) vs. defensive shares (XLP). After the recent rally, this ratio rose above its previous peak and currently trades only moderately below that crest.

Another recurring trend is the ongoing lack of support for expecting that US small cap stocks (IJR) will outperform their big-cap counterparts (SPY) in the near future. Using this ratio as a guide continues to forecast that small caps will underperform large caps.

A similar profile applies for the relatively weak value risk factor in the equities market. Large-cap value stocks (IWD) remain on track to post relatively weak results vs. large-cap growth stocks (IWF).

Although the future’s still uncertain, the charts above offer a proxy for assessing real-time market sentiment as a tool for estimating a calculated risk on the near-term outlook.