Risk-On vs Risk-Off: STOCK Market Breadth & Sentiment & GRowth vs Defensive Sector Price Action

Below we consider various indicators and measures of risk-on and risk-off ivestor sentiment and behaviour. But initially we can get a broader perspective by viewing indexes that blend individual measures together. The Barclays Equity Euphoria Indicator (EEI) was created by Barclays to measure investor sentiment and euphoria. It uses volatility, derivatives and options activity in the US equity market. During the Dotcom bubble and the 2021 stock frenzy, the EEI reached elevated levels signalling a reversal was more likely. It is when we see these elevated levels that a reversal is much more likely to happen.

Look for terms like "Barclays Equity Euphoria Indicator," "Barclays EEI," or "Barclays market euphoria" on sites such as: Investing.com and failing that... google it.

High Yield Corporate Bonds - A Leading Indicator for The Stock Market

High Yield Corporate Bonds (aka 'Junk Bonds') tend to lead the wider stock markets... a decent leading indicator.

As can be seen in the image below, there is a perfect correlation between declines in High Yield bonds and declines in the stock market. The direction of travel of high yield bonds in a clue to the direction of travel for stocks.

'Bottom of The Market' Indicator - Long Term Market Breadth

Market Breadth is a measure of the percentage of stocks above their 50 day or 200 day moving average in any given index. The longer term view of this graph is a pretty decent indicator of bear market 'bottoms'.  The highs is market breadth are often achieved so this charts works better at predicting lows which are not so often seen

The red marks in the image below show longer term lows in market breadth. The red marks show a bounce off a low that has gone lower than about 20%, both during and after the Great Financial Crisis 2008. Each time this has happened the market rallied off those lows into secular bull markets...

The image above shows up to about the middle of 2022. The chart below is fully up to date and shows that in 2022 a similar bounce was observed. The 50 day chart is also confirming the longer 200 day trend at it currently stands (at the time of writing at 90 so the trend is currently up.

As our Global stocks funds/indexes/trackers are about 60% SP500 stocks. market breadth will match fairly closely with the SP500 breadth but it's still worth keeping an eye on something like the MSCI World Index 200 day breadth. At some point in there could be outperformance of the US or a reduction in the percentage of US stocks in the Index.

Isabelnet - Market Breadth

Percentage of Stocks above 50 DAY Average (Long Term Chart)

This weekly chart has shows major lows when the stock market has bottomed out. So I would be looking or a major dip as seen in the chart and then re-investing when the dip reverses...

The Bullish Percent Index

The Bullish Percent Index can provide short to medium term indication of price direction by measuring how many stocks in a market index are in bullish trends. BPSPX below shows this for the SP500.

NASDAQ 100 Bullish Percentage

The long term NASDAQ 100 BPI chart below highlights the green lows where sentiment changed from bearish to bullish at the low points of the 4 major downturns in the US stock market. The shift from extreme bearish at the low of a pullback or downturn is what we would be monitoring to call out a change of trend if we are at the bottom. 

The vertical lines on the long term chart below show The NASDAQ market breadth dropping below 20 and then heading back up to 30 as a good time to buy the NASDAQ at extreme lows in the bullish percent readings....

This can be married with looking for divergences in the RSI of the BP Index for the NASDAQ. Note: this can also be done for the BP chart of the SP500, but as the NASDAQ leads the SP500 when it come to risk on/off sentiment then the first port of call is the NASDAQ.

The blue diagonal lines pointing down on the RSI chart section below can be matched with blue diagonal lines pointing down on the $BPINFO chart section (the Tech sector BP Index) showing the potential incoming declines in tech (risk-on). The chart below is the daily chart and so will be susceptible to false divergences and so we would need to switch the chart to weekly to get our sweet spot to detect meaningful longer term trend changes to the downside or upside...

New Highs & Lows Index

As can be seen from the new highs/lows index chart for the SPX (NEWHISPX) below, the 2020 pandemic red bars can be clearly seen. Once we see a few red bars in a row growing in size its a pretty decent indication something is up and selling might be considered...

The 2 Best Market Breadth Momentum Indicators

The McClellan Volume Summation Index can also be used to measure Market Breadth momentum. This indicator is touted as suited to identifying major trend reversals due to the fact that the McClellan Volume Summation Index is the long-term version of the McClellan Volume Oscillator.

The Advance/Decline Indicator rises when advances exceed declines and falls when declines exceed advances. You need to compare the Advance/Decline Line with the performance of the actual index it is tracking. The Advance/Decline line should confirm an advance or a decline by heading up or down at the same time. So when it starts trending down is when we will be interested. 

Divergence in 'advance/decline line' (ADL) points to price action reversing in the direction of the ADL line.

'Market in Decline' Indicator - Rydex Asset Ratio

This is quite a specialised index. In short if the MACD of this chart is above the zero line it's a pretty good indicator that the market is in decline currently. Or, when the actual value of this index hits 0.08 and then springs off this value as it's base, it's a sign the market is going into reverse...

The CNN Fear & Greed Index, the NASDAQ & CTA Machines - Short Term Outlook

CNN Money (the finance arm of CNN) developed a sentiment tool called the “fear and greed index” to gauge the situation in the stock market. The index uses a number of sub-indexes to indicate if market participants are fearful or greedy. The current value of the Fear/Greed indicator is if no interest to us in our quest to detect trend changes, so on the page CNN page below, switch it to the 'timeline' setting and see if there is fear based trend down in the chart. The medium term trend for the F&G index and how that relates to the SP500 over the past few years can be seen in the Macro Micro link...

• CNN: FEAR AND GREED Indicator

• Macro Micro: FEAR & GREED Indicator overlaid with S&P500 

The Bull to Bear ratio will decline when sentiment leaves the market and that is when selling in equity markets is seen...

• Bull to Bear ratio

• Bulls and Bears spread

NASDAQ Risk-on Market Price Trends down After Rate Cuts?

Highlighted below are the two previous financial crashes 2001/2008 precipitated by Fed rate cuts. If we see the risk-on NASADQ market start to trend down as risk-on appetite starts to wane, it's a warning sign...

Risk On vs Risk Off is Portrayed Through "Leadership"

NASDAQ vs SP500: -

Risker asset classes/indexes such as the NASDAQ can be compared to the broad market SP500 to gauge is the riskier index is 'leading' the less risky index. If that is the case then a risk on environment for stocks should see them drift higher in that risk-on landscape. The AVWAP line tieds to significant highs and lows is in the chart below shows the risk on outperformance of the riskier NASDAQ compared to the SP500. When the comparison proce action trades above the AVWAP lines then risk off is prevailing and stocks are likely to do well. And, vide versa when prive is below the AVWAP...

High Yield Bonds vs SP500: -

High Yield Bonds are known to be a decent leading indicator for the general direction of stocks. Note, you could do the same as above an create a comparison chart but also you can just stack the charts one on top of the other and you can see the decline the HY bonds along with the decline in stocks...

HYG (The main high yield bonds ETF) can show divergences ahead of price trend changes in the SP500 as show by the blue lines on the chart below...

Stocks vs Bonds: -

This one's a pretty good indicator for turns in the markets seen at recessions and market crashes as can be seen  on the chart in the link below.  switch to the 50 year view and you will see the 1987, 2000, 2008 peaks in stocks leadership switching to bonds. When we see this happening om this secular long term time frame, then it's a decent trigger to start deallocating equities...

• STOCKS vs BONDS

(Stocks = S&P 500 : Bonds = Total Return Bond Index)

Risk-On/Risk-Off & Sentiment

For the most part the stock market has 2 modes... 'risk-on' with bullish sentiment and behaviours from both consumers and investors and 'risk-off' with bearish sentiment and behaviours. One of the best indicators for risk-off consumer sentiment is when XLP (Consumer Staples ... i.e. defensive = risk-off) start to out perform the broad SP500 Index. As can be seen in the chart below the rise and fall of the SP500 is very well correlated with the rise and fall of XLP/SPY. The green line is the 50 week MA...

Another great indicator for risk-off consumer sentiment is when government bonds (TLT ... i.e. defensive = risk-off) outperforms the broad SP500 Index. As can be seen in the monthly chart below of the SP500 the 2008 GFC is accompanied by TLT/SPY trading below the ten monthly MA line when the price action crosses below the MA. The dotted vertical lines below show when this signal triggered without a 'yield-curve' inversion/un-inversion. The solid redline followed by the red box is when this signal triggered WITH a 'yield-curve' inversion/un-inversion. As can be seen, if history repeats here then we are heading into a financial crisis is 2025...

VANILLA SP500 TRENDS

Without looking at any of the comparison charts below which measure the relative performance of the SP500 against other global asset markets, we can use basic technical analysis and trend analysis to see quite clearly if there is a risk-on or risk-off bias in the stock market.

The monthly MA 'envelope' indicator below, which is similar to the Bollinger Band indicator, shows the 3 previous 'real' secular downturns in the SP500. (The covid crash was a one off flash crash.) We see the price transitioning from above the upper MA line to below the lower MA line, which then acts as resistance in the new secular downtrend.

The envelope settings below are ENV (12, 2, 3) . 

The daily chart of the SP500 below uses a 200 MA envelope (ENV 200, 4, 2) to illustrate the 2022 downturn and the kind of transition we are looking out for on the smaller timescale...

The same daily chart of the SP500 below uses a AVWAP from the 2022 Peak (red line) acting as resistance on the way down but then the AVWAP from the 2022 low (cyan blue line) acting as support along with the two Covid high/low AVWAP lines. Then in the far right of the chart, the change of trend is confirmed by price action breaking above the red line as opposed to pinging off the down side in the downtrend in 2022. The angle of the red line AVWAP is also levelling and starting to turn up indicating a change of trend. 

The same 2022 downturn is shown below on the weekly chart below. The longer term 200 weekly MA marks a real secular line in the sand. (See the red line in the chart below.) For long term investors this is the point at which the stock market 'makes a stand' and starts a recovery from a downturn. 

As can be seen below, the real warning sign is when the price heads down below the 30 week, then the 40 week and finally the 50 week MA and then fails to climb back above the 50 week MA on its first attempt to do so. (Seen on the chart below in FEB/MAR 2020, the FEB/MAR 2020, In OCT/NOV 2023 the first attempt to recover succeeds and we then see the current (at time of writing) bull market of 2024.
(Some analysts believe that this 2024 bull market is an AI bubble which will burst as yield curves uninvent).

Buyers come in a 'buy the secular dip' to snap up bargains for long term gains. Long term investor who do nothing gain from this. t's worked every time in history up to this point and we have no reason to believe it will be different when we see the next secular bear market...

30 WEEK MA / 250 DAY MA / 40 WEEK MA

The 250 day MA is slap bang in the middle of the 30 and 40 week MA's. The slope/angle of the 250 day MA is another often quoted/used indicator. If it is sloping down it signals a greater probability that there is incoming momentum to the downside.

THERE IS NOTHING NEW UNDER THE SUN...

The pattern above plays out over and over again. The 30 40 50 week MA's below are showing a flip to real bear market (in the amber box) with MA’s starting to form a cleaner downtrend with whitespace between the MA lines rather than converging MA’s that then start turning back up (... as in the blue box)...

The long term monthly MA Envelope chart below with MA envelope settings (12, 2, 3) shows risk-off down arrows on the envelope. The price cuts through the envelope in 1983, 87, 90, 94, and 2000, but it's only in the year 2000 that the breakout below the envelope is sustained and as in the envelope charts above, the first attempt to climb back above the envelope fails and a real secular downturn is confirmed. In this case it was the DotCom crash...

…. the chart above takes up to the dotcom bust. A Full on secular bear market is confirmed when the 30 30/40/50 week MA's break down below the 200 in this manner/angle...

…. a tell tale sign to watch out for before a secular bear market is an increasing number of times the Price pings off the 50 weekly MA. This is likely a secular "topping process"… 

…. this is markedly different from the example below of the 3 years between 2015 and 2018 where we see the 'bend' of the MA's without the decisive break down to the 200 MA. 

…. 2018 was a bad year for stocks but if you held your nerve, once you saw the price heading back up the blue 3 year consolidation box toward the MA's you can be fairly confident that the consolidation phase is coming to an end with the next expansion phase the more likely outcome.

We see the exact same pattern for a similar timespan play out between 2021 and 2024...

Indeed, this is one of the problems with investing... your are playing the 'long game' You might start investing at the start of 2022 above and would have to wait 2 to 3 whole years to break even. If you read this blog and understand that this is just how the stock market works, then its easier to stomach but will still be uncomfortable.

The 94/95 consolidation base (see the blue box below) led to a 5/6 year bull run until it came to an end. This could possibly be what we have just seen with the breakout in 2024 that could take us up to a blow off top anywhere between 2025 and 2030. Regardless, we will be using the long term charts as described in this page to watch for the signs of a topping process occurring before 2030 and that is my base case. I believe 2025/26 topping process is much more likely than a sustained bull run to 2030.

Compare the chart below with the 94/95 base, to the chart below that one with the 'theoretical base' 2022/24.

The Dow Jones

The Dow Jones represents the industrial base of the US Stock Market and is an important 'bellwether' for the overall direction of that market. The chart below represents an 125 year chart for the Dow on the monthly timeframe. As at the end of 2024 you can see that we are right at the top of the upper trend line which links to the 2000 Dotcom peak and the Great Depression peak in 1929 before that. 

From a TA standpoint, I am looking at the 'rising wedge' (as shown in the chart below on the top right hand side) so a break to the downside of that wedge is more likely, and if that does happen that could be very bearish over the next few years potentially ...

THE DOW JONES INDEX

The Dow gives us another major index to assess market strength. Look for the bullish and bearish cross overs on the PPO  for the DJ AVERAGE chart below as a particularly good indicator of the longer term trend. The DOW vs NASDAQ chart below shows leadership of the DOW above the 200 day MA switching back to leadership of the riskier NASDAQ when the chart line crosses down below the 200 day MA. (Risk-off to risk-on)

Now, lets take a look at chart as a taste of what is coming below! The DOW represents the more traditional stocks (risk-off) whereas the the NASDAQ represents the new world of tech and innovation, which is inherently more risky (risk-on). The relative performance of the DOW against the NASDAQ as a good barometer for a risk-on (chart is sloping up) market vs a risk-off (chart is sloping down) market.  

RELATIVE/COMPARISON CHARTS

The following assets and indexes can be compared on a chart by dividing the growth (risk-on) asset by the risk off asset. So when the charts are trending down it points towards a change of trend to the downside, to risk off.

Before we start out take on these charts you can view the link below for the most fantastic resource for long term comparison of price growth in different asset classes and markets. It's well worth a view to see where these different assets classes are heading in comparison to each other...

• LONG TERM TREND CHARTS

NASDAQ vs SP500: -

When investor sentiment is risk on the riskier tech-oriented NASDAQ index will outperform the S&P 500. So, when these are compared in the chart below you can see the direction of the price action in the 2022 bear market was down and then at the turning point (low) in 2022 we see the price action trending up. The ‘anchored volume weighted average’ AVWAP lines you see on the chart can be good indicators of the trend. For example the shorter term AVWAP where it says “C” in the chart below shows price action trading above that AVWAP which is bullish for risk on sentiment. When an AVWAP is anchored to the 2021 high the price action can be seen to be starting to trade above that AVWAP and so this is another bullish sign that the longer term trend is turning up and is more likely to reach that 2021 high again...

GROWTH STOCKS vs VALUE STOCKS: -

SCHG divided by VTV is a good risk on/off indicator for the broader stock market (SPX also shown below).

The Ichimoku cloud on the weekly chart below signals bullish risk-off when the blue line crosses above the red line. And vice versa. When the green ‘span’ line crosses below the blue/red lines and then below the green cloud it’s bearish. And vice versa… 

SP500 Risk-off/on Sector Rotation

When the US equity market switches to defensive mode you will see the defensive sectors turn/trend up on their respective comparison charts against the SP500 from their longer term down trends...

• the 3 sector ETF's that are most sensitive to the economic cycle are Banking, Consumer Discretionary and Real estate. Each of these weakened before the GFC. This is a Key warning signal. track the 3 biggest US ETF's weekly/monthly for these sectors as part of risk on/off analysis...

• XHB (and XHB/SPX)

• XLK (and XLF/SPX)

• RSPD (and RSPD/SPX)

Consumer discretionary vs Consumer Staples: -

In a risk off environment consumer discretionary spending (...the XLY ETF on the chart below) will decline when compared to consumer staples (...the XLP ETF on the chart below). This is a decent indicator of the overall health and sentiment in the economy and in stocks/equity markets.

SP500 vs Consumer Staples: -

In a risk off environment consumer staple spending (... the XLP ETF on the chart below) will increase when compared to the SP500. The 2022 bear market below sees the XLP:SP500 comparison line start to break up through the daily moving averages (MA) starting with 20 day and ending with the 250 day. When this line is trading above the 200/250 day MA it is risk-off and will be matched with equity market selling and declines in teh SP500 and therefore our standard global equity funds...

• The same chart on the longer term monthly timeframe below shows on the left hand side the sharp rise in the leadership of XLP and this marked the start of the Great Financial Crisis of 2008. 

• The Ichimoku cloud chart below on the weekly timeframe shows the comparison price line breaking through the red cloud to confirm leadership of Staples in the 2022 bear market. The same chart below the cloud chart for the same timeframe and time period shows the same conclusion of the 2022 bear market using crossovers of the 30 day, 40 day and 50 day MA's.

• The Ichimoku cloud below signals bullish risk-off when the blue line crosses above the red line. And vice versa. When the green ‘span’ line crosses below the blue/red lines and then below the green cloud it’s bearish. And vice versa… 

The cloud chart below shows the bear market odds increasing at the start of 2022 with momentum and leadership over SPY. This indeed predicted the 2022 bear market with a 20%+ decline in the SP500...

…. zoomed in chart below shows market peak in oct 2007 and then the XLP:SPY starts turning up…. 

… risk off …. look for XLP:SP500 to break through the MA’s as below… 

Below is the weekly chart showing the 200 week long term trend red line with highlighted section showing what Fear looks like with regards to inflation, interest rates and Fed policy. 

Outperformance of energy stocks vs the SP 500 is a pretty good indicator of weakness in the SP500. So, when XLE/SP500 chart on top below trends ups, the SP500 will tend to trend down... 

 Are Bullish Sectors Leading Higher

The 8 sectors and indexes below within the main SP500 Index (and some outside of the SP500) are seen as 'bell weathers' for a strong stock market in general. An example below (from late NOV 2024) shows these sectors/indexes all pointing up which is the sign of a strong stock market...

Risk Off ... Bonds Lead Equities

In a real downturn we would expect bonds to lead over equities...

History shows that if there were recessionary fears in the market then the following chart AGG/SPY would not be sloped down and making a 53 week low… 

Below is the same chart as above but with the weekly MA’. The 2020 and and 2022 risk off periods show aggregate bonds performing wells compared to stocks… 

RISK ON tech sector XLK vs RISK OFF defensive 1-3 YR BONDS (The dotted lines are AVWAP so look to maintain above these for bullish price action) Above the longer term 185 day MA sloping line is long to medium term risk on. On the right hand side you see the double bottom … but for example needs to break above neckline and reverse the blue MA line above the green MA to confirm the continuation of the uptrend. 

…. and for intermediate bonds below… the GFC crash risk off is shown on the RHS of the chart with the ensuing part of the chart from 2009 onwards showing risk-on prevailing with the outperformance of the SP500… 

….during the GFC IEF ETF did quite well as economic fear caused a lowering on interest rates which was good for bonds… 

The most sensitive risk off measure of T-BILLS vs SPY is shown below with the 2022 clearly seen in the chart.. 

GFC bearish and bullish shifts displayed below where the bearish points start checking off before the downturn and vice-versa for the shift to bullish price action and recovery in the sp500… 

Corp Bonds vs Gov Bonds

In the chart below, the Corp Bonds ETF divided by the Gov Bonds ETF highlights in red boxes the period when the price comparison moves below the weekly 30 MA and is typically accompanied by the MACD crossing below the zero line. These periods are almost always bad periods for the stock market...

DR COPPER

The monthly chart of copper (“COPP” below) marks out the lack of demand and therefore risk off or the bullish NASDAQ market… 

Growth vs SP500

… and the bullish breakout below for the global tech ETF portrays bullish growth. Below that chart a similar story can be read for the Nasdaq 100 tech sector… 

'Secular' up-trending markets tend to make a stand at the 200 weekly MA as shown below in the bullish comparison chart. 2022 marked a 20%+ correction in stocks. 

Are Small Caps (The Russel 2000) Leading Large Caps? 

The Russel 2000 is the US Stock Market Small Cap Index and is another important 'bellwether' for the overall direction of that market. Small Caps tend to lead large caps of the SP500. The chart below dates back to the 1980s for this index's monthly chart. As at the end of 2024 you can see that we bounced off the upper trend line and we are at the point of forming a double top (bearish) or breaking to new highs (bullish). If the Russel 2000 breaks to new highs then it will likely lead the SP500 higher.

Standard technical analysis for an 'M top' (double top) measures from the top of the 'M' to the neckline, and then moves that down again from the neckline to set a target for a bottom as a likely point of reversal back to an uptrend. As shown on the chart, this would mean a 35% drop from the current price ...

Small Cap stocks are another growth asset requiring the right set of macro-economic conditions to prosper. The beauty of technical analysis is that it can tell you when the the asset is reactive favourably to whatever those market conditions are.

In the chart below the US small cap ETF IWM is crossing back over the MA's so allocating some some SP500 to buy IWM might be a smart move... 

The same can be done for mid-caps and you would probably be doing that at the same time as buying small-caps as described above, but personally I don't. It's too much work and if the conditions are full risk on, there is more growth in small-caps anyway so, for me, I'm either 'risk-on' in small-caps or 'risk-off' in large-caps. (Although I probably wouldn't be all-in small cap, but rather just 'tilting' the portfolio one way or the other.

DIVIDEND STOCKS vs SP500

Safer (risk-off) dividend stocks will outperform the SP500 in a downturn as shown below in the highlighted 2022 stock market correction. Although this might look good, these dividend stocks will also sell off so what this shows is a lesser of two evils...

… SP100 SP mega-caps also point to bullishness as of early 2024… 

… This growth ETF below is similar leading bullish indicator… 

AVWAPS on the NASDAQ and RSP (Equal Weight SP500)...

VANILLA PRICE CHARTS

The Financial Sector Trend

The financial sector will inevitably decline in a bear market. So the big iShares financial sector ETF will behave as seen in the monthly chart below. In 2008 you see the XLF price drop below the green shaded Ichimoku cloud. And it is likely that in the next financial crisis we would need to see the same pattern start to emerge...

The Tech/Growth Sector Trend

The tech sector will inevitably also decline in a bear market. So the big iShares tech sector ETF will behave as seen in the monthly chart below. In 2008 you see the XLK price drop below the green shaded Ichimoku cloud. As with the financial sector, in the next financial crisis we would need to see the same pattern start to emerge.

Same goes for the NASDAQ monthly chart below XLK.

SP500 and the Clouds

As of early 2024, you can check all of the bullish boxes and none of the bearish boxes… (the stronger/thicker red line below is the sp500 price line…) 

ICHIMOKU CLOUDS show when there is a positive longer trend in a Stock or index… (longer term trend shown by the weekly chart below for the SP500 shows dot-com bust and GFC… 

USA vs Rest of The World

ASSET ALLOCATION... THE US vs THE WORLD

The US Stock market SP500 is the Stock Index by which all others are measured and currently, about 60% to 70% of most standard global funds will be invested in this one stock Index as that is the US share of global stock markets.

Each month I also take a look at how non-US equity asset classes/regions are performing compared to the US SP500.

For example Emerging Markets (EM) comparison to SP500 chart below shows the relative secular bear market that this asset class was in in the early 2020's. Owning an EM ETF/index fund at this time would have dampened down returns. depending on how much EM you had allocated to your portfolio. (Most standard funds would have a low allocation in any case)

…. and the top 50 stocks in Europe… 

What Does Risk-on and Risk-off Look like?

"Markets top on good news and bottom on bad news." ... is a well known phrase defining all market tops. The Dotcom peak below in 2000 was matched by euphoria in tech stocks as well as positive GDP. As you can see the price action is strong trading above the green 50 weekly MA and the Ichimoku green cloud. Price action on the way up is also matched by the weekly RSI spending most of its time above the 50 RSI level.

All of a sudden, with all of that euphoria flying around, we get a "50:50" signal as shown below. The RSI crosses below the weekly 50 RSI level and spends most of its time for the next 2.5 years below 50. This was matched by a recession and low GDP readings. The 2007 GFC crash paints a similar picture on the weekly chart below the 200- Dotcom crash chart...