The Return of Risk Appetite

by Tyler Craig on August 7, 2012

The so-called “risk on” trade has ruled the roost in recent days.  A return of risk appetite to Wall Street has resulted in a mass exodus from safe havens like US treasury bonds and the US dollar as well as defensive sectors like utilities and consumer staples.  To the delight of the bulls this flood of money has found a new home in offensive sectors – who tend to outperform during healthier markets -  like technology, basic materials, and financials.  Not to be outdone, small cap stocks have also changed their stripes from a laggard to a leader over the past week.  All told, this shift in performance serves as a compelling piece of evidence supporting a more bullish backdrop to the US equities market.

This change in character is captured nicely in the following graphic comparing risk-on related areas like oil, financials, and consumer discretionary to risk-off related areas like bonds, the U.S. dollar, and utilities.  The chart covers the past week’s performance relative to the S&P 500 Index.

While one week does not a trend make, this change in character undermines the argument that the US equities market is unhealthy because safe havens are leading.  Provided this favorable turn of events persists bullish setups should not only multiply but also have a higher chance of success.  With dips being bought and rallies running long in the tooth, bull retracements and breakouts should perform well.

How long this resurgence in risk appetite lasts remains to be seen.  But, hey, while it’s here why not unleash your inner bull and start taking advantage of the quality bullish plays which have been and will continue to come across your path.

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