Risk Off Accelerates

US equities remain under relentless pressure, giving up some hard-fought gains earlier in the week. Stocks dropped about - 2% on Friday and all key indexes closed negative for the week. Equity outflows hit $46 billion, a record according to Lipper Analytics.

Unfortunately, rather than being a good contrarian signal this negative sentiment is likely to hang around like a bad smell for at least the next three months.

The sell-off occurred despite the news that the trade war with China was put on hold. The truce was initiated by China as a temporary fix while it tries to figure out how to ameliorate sharply declining retail sales and industrial production.

Two weeks ago, our Alpha Rotation model shifted from cash into Long Bonds (TLT) and is currently sitting on a +2.73% gain versus a 5.51% monthly loss for the S&P 500.

The Alpha Rotation trading model uses five key intermarket relationships that gauge the appetite for  risk. Currently, all risk metrics are showing risk off and getting worse.

Until this model improves, we remain negative on equities although a short-term technical bounce is always possible.

This week’s takeaways are:

  • Risk Gauges remain at full risk off
  • Momentum readings on both weekly and daily charts for US Equities are confirming price action
  • Utilities (XLU) is the best performing sector YTD + 7.9%
  • Bio-tech (IBB) is the only sector showing positive price and volume reading relative to the S&P 500
  • Despite the move to new yearly lows in Russell 2000 (IWM) sentiment (VXX) remains locked in a tight range which is neutral for the moment

Disclosure: 

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