Risk-off rotation suggests trouble may be brewing

In a recent blog here, I noted that market breadth was turning bearish. You can view that blog to see the charts, but in a nutshell, I observed that the cumulative A/D line (Advances vs Declining issues on the NYSE) was negative against the more narrowly focused S&P 500. This means that its been a smaller crowd of stocks doing all of the lifting in the recent rally back to 4100-ish on the SPX. I also observed that the Dow Transport Index was dramatically underperforming the Dow Industrials of late. Another sign of non-confirmation in the recent market rally. As noted in the blog, these breadth signals are typically LEADING indicators, meaning such divergences tend to happen in advance, rather than in conjunction, with a correction. Today, I present another couple of things to watch when determining the health, or sustainability, of a market rally.

To start, we should understand that the S&P 500 index is comprised of 11 sectors, which are further broken down into industry groups, then 67 industries, and then further into 156 sub-industries. Obviously, we want to keep it simple by focusing on the 11 sectors when viewing market performance.

The next thing to understand about the SPX is weighted by float-adjusted market cap, so the higher a company’s market capitalization, the more influence the company’s stock price has on the price of the index as a whole. To the point: of the 11 sectors in the index, the biggest weightings are:

  1. Technology: 28%
  2. Health care 13%
  3. Consumer Discretionary 12%

With the exception of the Healthcare sector, these are pure growth/ risk-on sectors of the market. So, 40% of the SPX weighting is in risk-on stocks (Consumer Discretionary, and Technology stocks). Beyond looking at market breadth indicators like the AD line and the INDU vs. TRAN performance, we can compare the heavily weighted risk-on sectors (Technology, Discretionary) to the lower beta, boring, risk-off sectors of Utilities and Consumer Staples. Lets do this now, via the SPDR ETF’s of those sectors. This can give us a reading of the underlying attitude by investors, and more clues as to potential future moves.

Risk-on sectors

Here’s the heavily weighted Technology sector via the XLK ETF. Note the drop from overhead resistance.

Here’s the Consumer Discretionary sector via the XLY ETF. Another failure at resistance.


Risk-off sectors

So, we’ve just noted the recent weakness in the two largest sectors of the SPX which also happen to be growth/ risk-on sectors. Now lets look at the least growth-orientated, most risk-off sector there is. Here’s the Utilities sector via the XLU ETF – note that money is rotating INTO this sector…does somebody know something that we don’t about market risk at this moment?

Another risk-off benchmark sector. Here’s the Consumer Staples sector via the XLP ETF. This sector has also been rising as the risk-on sectors are showing weakness. The only caution insofar as investing is concerned is the massive overhead resistance about to be tested.



At the moment, we are seeing some rotation back into safe heavens. The timing of this may be fortuitous, as the rotation out of risk-on stocks into risk-off stocks statistically happens more often into the seasonal “Sell in May, Go Away” period. That period starts in just a few weeks. This might suggest that the rally seen from January to now may be “just another rally” within what I am convinced has been a base/consolidation pattern for the SPX- as seen on the SPX chart below.

I’ve noted  lid of 4100 – 4200 in many blogs over the past number of months. Until we see a definitive break of that zone, we are still in a consolidation pattern. Given the obvious signal by the market of the risk-on to risk-off rotations happening, there may be an argument for another bout of volatility.  In other words, another failure to break 4200, and and an ensuing drop for the S&P 500 coming soon. That drop could easily bring us back into the 3700–3800 zone of support.

We shall see!


  • Hi Keith,

    What will happen to the S&P 500 if we have a mild recession or a hard one?

    Thank you


    • Markets tend to sell off leading into a recession then as recession is acknowledged, markets tend to rise. That’s because when we acknowledge recession, the Fed/BOC will stimulate/ use accommodative monetary policy reversing the tightening that lead us into recession. I strongly suggest you read this blog for an explanation on how that works:

  • Hi Keith
    Just letting you know there is a typo “Here’s the Consumer Discretionary sector via the XLP ETF.”

  • I heard someone suggest that the interest tightening never stop until it exceeds the rate of inflation – is this true ?

    • Not that I know. But then again, I am just a humble Technical Analyst!


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