The "risk-on" trade seems to be hanging tough as more than a passing fad. Risk-off means that money is flowing into safe havens like U.S. Treasuries and solid currencies like the U.S. dollar and Swiss franc; whereas risk-on means that money is flowing into more speculative assets like equities, commodities, emerging markets, and higher yielding currencies. Perhaps investors have grown weary of low bond yields and the incessant chatter about impending financial Armageddon. Now that riskier assets have shown that they can hold support levels, new money is slowly but steadily showing up for the party. Slow is good.
For 2011, the Barclay's U.S. 20-year Treasury Bond Fund (TLT) was up about +28%, while the SPDR S&P 500 Trust was up only +2%. However, the more speculative indexes didn't fare so well. The Nasdaq was down -1.8%, the Russell 2000 small cap was down -5.5%, and the MSCI Emerging Markets Index was down a whopping -22%.
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But so far this year (through Thursday), emerging markets, Nasdaq, small caps, and commodities have led the way—with the emerging markets index up about +9.2% and the SPDR Gold Shares (GLD) is up +7.2%, while the TLT is down -2.2%. Among the 10 sector iShares, Basic Materials (IYM) is up nearly +10% this year already. This week in particular, the emerging markets index pulled away from the pack, while the leading sector iShares have been Technology (IYW) and Consumer Services (IYC).
SPY closed Thursday at 131.46. The chart looks like it could keep rising for awhile. That's what happens when it doesn't give us too much all at once. RSI, MACD, and Slow Stochastic all could stand to cycle back down, but nothing says it needs to happen today. Still, a little pullback and technical consolidation would be welcome as a new buying opportunity. SPY has surpassed its October highs and will likely take a run soon at its 52-week highs from last May, near 137.
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One caution is that daily trading volume remains low, which means that price can move quickly in response to any major disruption or news flash. But so long as earnings reports continue to be mostly good and economic reports tend toward the positive, this market sure seems to have support.
The VIX (CBOE Market Volatility Index—a.k.a. "fear gauge") closed Thursday at 19.87, which was down nearly 5% on the day and puts the VIX below strong support at the 20 level. This is bullish for stocks as it indicates a lack of investor fear—i.e., risk on.
The TED spread (indicator of credit risk in the general economy, measuring the difference between the 3-month T-bill and 3-month LIBOR interest rates) is finally turning back down from resistance at the 60 level. It closed Thursday at 52.56. Although it still indicates elevated investor worry about bank liquidity and a preference for the safety of Treasuries bonds over corporate bonds, this marks a potential trend change that would further bolster the risk-on trade.
In case you missed it, Sabrient's annual "Baker's Dozen" Top 13 Stocks for 2012 were unveiled on January 5 in a free live WebCast. Sabrient's founder and chief market strategist David Brown was the main speaker, and Luke Rahbari of Stutland Volatility Group offered up his suggestions on how a trader might execute options trades on some of the names on the list.