Have we seen a fundamental shift from “yield seeking” to “risk aversion”? We have seen a fall in the S&P 500 and Russell 2000 by some 6.5% over the last 5 trading days. The million dollar question is: does this action constitute a change to risk aversion…….and does this mean that we are likely to see new multi-year lows in the S&P 500 over the coming weeks? If there has been a change in mood then it would not only show up in major market indices (like the S&P 500) it would also show up in other asset classes, such as emerging market debt, high yield (junk) corporate bonds, small cap equities, and currencies. Let us look at the behavior of these asset classes for clues as to the underlying mood of the market.
Today we look at large mutual funds/ETFs of each asset class as a proxy for the behavior of each asset class. What are we looking for? If there is a change in mood then we should have already seen it show up in the charts below with clear breakouts.
From the charts below it would appear that the only breakdown worth noting has been in small cap equities (underscoring the weakness in equities). However, this weakness has not been well supported by emerging market debt, high yield corporate bonds, or the Aussie dollar (our proxy for high yield currencies).
We can only turn bearish on equity markets if there is across market support for a move to risk aversion. For the time being at least we do not see conclusive proof that there has been a break down in “risky” assets. Until proven otherwise our conclusion is that the weakness in the S&P 500 is merely the markets attempt to shake out the weak hands in the market……a correction in a developing bull market. Accordingly one should see the current weakness in equities as a buying opportunity not reason to sell.
This begs the question – at what point do we turn bearish on risk seeking……at what point do we put up our hands and say we are wrong? We need to see the charts above register negative rates of change on a rolling 100 day basis (5 months).
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